It seems that marijuana stocks are finally starting to find some traction. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has risen 10% in recent weeks and found technical support. And some of the sector’s individual stocks, such as Trulieve Cannabis (OTCMKTS:TCNNF), are near their record highs. Canopy Growth (NYSE:CGC) stock is in the middle of the pack. Its shares have risen significantly in recent weeks, but they are still well below their 52-week highs.Source: Shutterstock
That makes sense. There’s certainly reason to be optimistic about marijuana stocks. Market conditions are slowly improving in Canada, where cannabis is completely legal. Meanwhile, excitement is building about cannabis’ outlook in the United States.
The Election Could Be a Positive Catalyst
With the presidential election coming up on Nov. 3, there’s a good chance that the U.S. federal government will move towards the legalization of cannabis. While some individual states have legalized the drug, a Biden administration could greatly accelerate this process.
There have been some concerns that the Biden administration wouldn’t act swiftly. InvestorPlace columnist Chris Markoch explained why a change in the White House would help the industry. If marijuana is legalized or merely decriminalized, that would be an improvement over the status quo.
There are secondary effects of the current federal policy, such as banks being unwilling to lend to cannabis companies. Merely shifting to a policy of “benign neglect” toward the sector, Markoch argues, would offer the cannabis industry a great deal of opportunity. Meanwhile, outright legalization could be a game-changer.
Canopy’s Financial Results Remain Uninspiring
Before you get too excited, however, Canopy Growth itself has some challenges. The company’s business model is not yet proven to be all that successful.
Canopy Growth has generated rising revenues, but it has failed to report profits so far. And while the company has a favorable balance sheet, its cash position will dwindle if it doesn’t get its costs more in-line with its revenues sooner or later.
The bear case on CGC stock, in fact, is pretty simple. The bears say that Canopy isn’t just unprofitable; rather, it’s losing a tremendous amount of money.
Look at the company’s latest earnings report from August, for example. During the quarter, Canopy spent $135 million CAD on sales, general and administrative costs (SG&A). Against that, Canopy brought in just $111 million CAD of total revenues.
The $135 million CAD of SG&A spending doesn’t include the actual costs of growing, processing, packaging, and distributing the marijuana. Needless to say, this situation is not sustainable for the company.
Bulls will say that Canopy can grow its way out of this mess. That may be true. However, it won’t do so at its current trajectory.
Canopy’s revenue jumped 22% year-over-year last quarter. That sounds good, but it’s actually quite poor, since the company is burning through around $150 million CAD of cash every quarter.
Canopy’s saving grace is that it still has $1.5 billion CAD or so of cash left. But since it’s losing $150 million CAD every quarter to produce just $111 million CAD of sales, it’s in quite a pickle. Canopy can turn things around, but it needs help from outside forces such as favorable political developments to really move the needle at this point.
The Verdict on CGC Stock
Overall, the marijuana industry’s outlook has been improving. However, Canopy itself is not fully benefiting from these developments.
For more than a year now, we’ve heard that Canopy was very close to success. For awhile, Ontario’s lackluster retail store rollout was a good excuse for Canopy’s slow sales. Then the excuse became too much competition. Earlier this year, Canopy’s backers could justify underwhelming results by citing the fact that Covid-19 had caused many retail stores to stop operating temporarily.
At some point, though, Canopy needs to start living up to expectations. Investors simply can’t rationalize away disappointing results forever.
Canopy may still be the largest individual cannabis producer in Canada, but that doesn’t necessarily mean it’s the most promising one. The company has plenty of cash and that gives it options and a viable path going forward. But investors may want to wait for a significant upswing in Canopy’s results before buying its shares.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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