Should you invest in Canadian cannabis stocks like Canopy Growth in September?
Written by Aditya Raghunath at The Motley Fool Canada
Most publicly traded cannabis stocks were trading at record highs when Canada legalized recreational marijuana in October 2018. However, over the past four years, cannabis stocks have burned through massive investor wealth Canadians.
For example, the stock price of Aurora Cannabis, canopy growth (TSX:WEED)(NASDAQ:CGC), Chronos Groupand Sundial producers are down 99%, 94%, 88% and 98%, respectively, from all-time highs. Several factors are contributing to the underperformance of Canadian cannabis stocks.
Canadian cannabis stocks are high risk bets
The marijuana industry is highly regulated, resulting in the slow rollout of retail stores in major provinces, impacting consumer demand. Additionally, black market sales continue to account for a large share of total sales in the country. In 2020, cannabis sales on the black market were at $750 million, which is quite significant.
Thus, licensed marijuana growers overestimated demand and increased production capacity at an accelerated rate. But oversupply issues led to a large build-up of inventory, leading to million-dollar write-downs and significant losses.
Additionally, marijuana companies went on an acquisition spree when the cannabis industry was hot during federal legalization. Many of these acquisitions were overvalued and have now been amortized through goodwill write-downs.
Due to constant losses and a high cash burn rate, cannabis players have raised equity multiple times, diluting shareholder wealth. In 2014, Aurora Cannabis had 1.35 million shares outstanding. This figure increased to 185 million shares at the end of 2020 and is currently close to 300 million shares.
Is Canopy Growth stock a buy right now?
Last month, Canopy Growth announced its fiscal first quarter results for 2023 and posted a net loss of $2.08 billion. The majority of these losses were due to a goodwill impairment charge of $1.72 billion. It also reported cash outflows of $143 million in the quarter.
Its net loss was $5.23 per share, compared to earnings of $0.84 per share in the same period last year. The company’s net sales also fell to $110.1 million from $136.2 million in the year-ago quarter.
As Canopy Growth aims to increase cost savings over the next few quarters, its declining revenue growth is making investors extremely nervous as the company loses market share as marijuana sales continue to decline. grow.
A Statista report predicts cannabis sales in Canada will grow from $1.19 billion in 2019 to $8.62 billion in 2026. But Canopy Growth sales are expected to grow by $546 million over the course of the year. fiscal 2021 to $555 million in fiscal 2024, which is a slower pace compared to the overall market.
The next 12 months could be just as brutal for cannabis investors as inflation rates eat away at household savings, impacting revenue growth for Canopy and its peers. Additionally, higher costs for employees and inputs could lead to lower profit margins.
In fact, Canopy Growth has posted negative gross profit in three of its past five quarters, illustrating the extremely challenging environment in which it operates. There is a good chance that the WEED stock price will decline over the next year.
Should you invest in Canadian cannabis stocks like Canopy Growth in September? appeared first on The Motley Fool Canada.
Before you consider Canopy Growth, you’ll want to hear this.
Our market-beating team of analysts just revealed what they think are the 5 best stocks for investors to buy in August 2022…and Canopy Growth was not on the list.
The online investing service they’ve operated for nearly a decade, Motley Fool Stock Advisor Canada, beats the TSX by 27 percentage points. And right now they think there are 5 stocks that are better buys.
See the 5 Actions * Returns from 08/08/22
Foolish contributor Aditya Raghunath has no position on the stocks mentioned. The Motley Fool has no position in the stocks mentioned.