Canopy Growth CGC Stock and all that is wrong with it

I think everyone knows I am not a big fan of Canopy Growth CGC Stock for a multitude of reasons.  There are basically two, though.  First, it is… ahem, or was, the biggest on the complete list of Top 100 Cannabis Companies to get involved in cannabis investing but, never one of the best marijuana stocks to buy.  The thing with Canopy Growth CGC Stock is that they are a sort of one of the go-to cannabis companies.  Canopy Growth garnered a significant amount of headlines when cannabis was first legalized.

Then, Canopy Growth also got a massive injection of capital as an investment from Constellation Brands, a company looking to get into the cannabis industry.  Constellation invested $4B into Canopy.  Because of this, cannabis investing was having its heyday and cannabis companies saw their stocks soar.

The Reality of Cannabis Investing

Reality set in; marijuana stocks sold off.

Here is what I have learned about cannabis investing in a few years’ time of analyzing cannabis stocks: It is really easy to grow cannabis.  But, it is very expensive and difficult to grow really excellent cannabis consistently and inexpensively.  That is something you really need to consider with your own cannabis investing: Excellent cannabis is difficult and expensive to grow consistently.

If you can sit there for a long time and understand that one concept you will be guided in a direction that will likely serve you very well over the years with cannabis investing.

Therefore, I want you to say that over and over again: It is very difficult and expensive to grow excellent cannabis consistently, let alone large quantities of it.

Once you have grasped that after repeating it over and over again, all of a sudden some of the stocks you may be considering with cannabis investing may not be your best considerations.

Canopy Growth CGC Stock

I have looked at Canopy Growth CGC Stock many times over the two years including on this site.  If you cannot grow excellent cannabis inexpensively on a consistent basis, then the idea that these bigger cannabis companies would just crate massive facilities to produce massive quantities made no sense whatsoever.  This is why companies such as Canopy Growth CGC stock, Aurora Cannabis ACB Stock, Hexo HEXO stock, Tilray TLRY Stock, Cronos CRON stock, and others like them have faltered and are so deeply drowning in cash-burn purgatory they may never become a good cannabis investment.

One of the most important things about Canopy Growth is its size and prevalence in the cannabis industry as a cannabis investment is that often Canopy Growth CGC stock ends up in ETFs.  Given this, when CGC stock goes down the entire industry takes a hit. This negates smaller stocks that are potentially top-tier on the complete list of Top 100 Cannabis Companies

Because Canopy Growth Stock CGC continues to falter many of the best marijuana stocks fall down along with these bigger cannabis companies.

Canopy Growth Financial Data

I am trying to bring in more and more the comparisons of each respective cannabis company and how each cannabis company compares to one another; You will want to check out one of my most important pages: The Complete List of Top 100 Cannabis Companies for this.

Here is the metric breakdown of where Cannopy Growth fits in with the rest of the cannabis industry:

  • #58 w/Revenue Growth Rate: -1.5%;
  • #12 w/Revenue Per Share: $0.301;
  • #73 w/Gross Margins: 13%;
  • #60 w/Operating Efficiencies: 116.7% (You want the lowest number possible;
  • #68 w/EBITDA Percent of Revenue: -83%; and,
  • #45 w/Debt – Asset Ratio: 46.9%

None of these metrics are solid by any standard.  And yet, this is exactly what I keep saying about Canopy Growth: They are so highly considered simply because they are big.  Yet, they underwhelm in every category except one of the least important categories: Revenue per share.

I’ll break down the numbers individually so you can see why none of this is impressive.

Revenues

Revenues are largely not happening. Remember what I said about growing large quantities of cannabis consistently?  Canopy Growth can grow lots of cannabis but, they cannot sell increasingly higher and higher levels of cannabis:

Canopy Growth Revenue
Revenue: For Canopy Growth Financial Data Visit CGC Stock Page

The #58 spot of revenue growth rate is actually 1st place for the companies that lost QoQ.  Fact is, Canopy has increased revenues modestly over the past year despite its loss QoQ this quarter.  Still, other companies fare much better.   I wonder on a 4-quarter rolling average what this might look like.  My bet is that because a four-quarter average would mellow out the ups and downs Canopy would be more impressive.  However, there are other cannabis companies out there that would also do very well.

But, the shortfalls in revenue growth are minor compared to the other issues with Canopy Growth CGC Stock.

Gross Margins

Canopy Growth’s gross margins are an embarrassment but, they serve to show that, yes, growing large quantities of excellent cannabis consistently is difficult:

Canopy Growth Gross Margins
Gross Margins: For Canopy Growth Financial Data Visit CGC Stock Page

The #73 spot on the gross margins metric is bad but, this is not the worst number Canopy Growth has printed.  The past four quarters have averaged 16.5% per quarter.  The Complete List of Top 100 Cannabis Companies has the best cannabis companies printing about 65%, or thereabouts.  CGC stock gross margins are well below average when you consider this.

#1 Market Share

At the same time, Canopy must not see an issue.  They claim to have the #1 market share in Recreational Flower; this, from its latest investor presentation:

Canopy Growth Investor Presentation
Canopy Growth Investor Presentation

It seems that everyone enjoys the #1 spot on the market share list.  I’ve read in investor presentations from Auxly CBWTF stock and others that they held the #1 spot in various areas but, I guess that was Cannabis 2.0.  Therefore, if Canopy Growth is in the #1 spot then when you see other metrics coming out of Canada such as growth in retail sales that are increasing significantly month after month, it leaves you wondering if Canopy has much upside potential.

But, Canadian retail sales continue to grow considerably.  This is being done in two methods: Organic growth in existing markets, and expanding into new markets.  Other competitors are able to compete in this manner, but Canopy Growth has not kept up the same pace.

Canopy Growth does not give us guidance for the year forward, which leaves us wondering what potential the year will have.  There are cost-saving objectives that Canopy Growth has maintained to continue to pursue.  But, we are not aware of the future revenue growth projections from the latest investor presentation.

Operating Efficiencies

Probably the biggest eyesore for me with Canopy Growth is operating efficiencies:

"Canopy

This is exactly where I see the issue being.  Canopy Growth received a large cash infusion and did two things:

  • Became a really big company overnight; and,
  • Become a really advanced company overnight.

Here is what I mean by this and you will see why this company is always on my worst list.  Canopy growth immediately began spending money on infrastructure for growing large quantities of cannabis in a short period of time.  The expectation was that they would be able to produce a large quantity of high-quality cannabis and deliver this to consumers around the country of Canada.  At the same time, Canopy Growth decided to fill in every single office position they could as quickly as possible showing that they were an advanced and sophisticated operation.

That actually proves my point, really.

What Canopy Growth did not do was focus on producing an excellent quality product as inexpensively as possible and being consistent at that.  They built ginormous facilities and they filled offices.  They created costs immediately without consideration to the fact that it is difficult and expensive to grow high-quality cannabis and do that consistently.

On a relative basis from the perspective of revenues, Canopy Growth is very inefficient.

EBITDA Profitability

One of the first things that are important to a new company just starting out is getting to EBITDA profitability.  If a company has an endeavor that they think will become profitable then all they have to do is reach a certain scale and then scale up.  However, in the case of Canopy Growth, their gross margins are paltry and operating costs are too high relative to revenues.  Because of this, EBITDA profitability will be elusive for some time:

Canopy Growth EBITDA
EBITDA Profit: For Canopy Growth Financial Data Visit CGC Stock Page

Canopy Growth has a long way to go to getting to EBITDA profitability.  First, gross margins are some 16.5% of revenues on average.  Then, operating costs are an additional 115% of revenues; albeit a data point that is improving.

Getting larger scale would go a long way to getting both gross margins and operating efficiencies to an improved level.  But, one the one hand Canadian cannabis is growing rapidly in new areas and organically in existing areas.  Yet, Canopy growth has not been able to maintain that growth rate.  It may be that Canopy Growth continues to maintain its dominance in flower sales for now.  Eventually, with more and more avenues opening up in Canada and Canopy Growth not being able to expand into these markets their position will merely be diluted downward.  They may very well continue to hold the #1 spot.  But, on an overall basis, I’m betting this number is lower and lower.

Is Canopy Growth CGC Stock A Good Buy?

Canopy Growth CGC stock continues to move lower and lower:

Canopy Growth CGC Stock

Canopy Growth CGC GrowthAs you can see, the chart tells the story more and more as the stock continues to dwindle downwards.  This will be the case of the MSOs in the United States simply because Canopy Growth is that go-to metric everyone considers.

Book Value Per share

What could Canopy Growth CGC stock be worth?

I like looking at book value per share.  This is an interesting metric. If you firesale everything in the company and give the money back to shareholders basically, you would be left with Book Value per share:

Canopy Growth Book Value Per Share
Book Value Per Share: For Canopy Growth Financial Data Visit CGC Stock Page

I use this to look for cannabis companies that are undervalued relative to book value.  In an efficient market, companies with a low book value per share would be pushed upwards simply because of movies like Wall Street where people come in and liquidate everything otherwise.  And, since people would come in and do this, it presents an opportunity for an outside investor to take advantage of that: They would buy the potentially undervalued company as it may be driven higher.

Relative to book value, with margins that are at the bottom of the listing, this is a company that is not poised for profitability and therefore is overvalued relative to its book value.

Time Is Money

One of the most important principles about cannabis investing is the concept that time is money.  We are all limited with time and cannot go backward and hit a reset button.  Because of this, it is very important to get your investments correct.

There are many investors holding cannabis stocks that are underwater which is difficult.  But, instead of averaging down, what a savvy investor looking to optimize their cannabis investments should do is find the cannabis stocks that offer the best opportunity for stock value appreciation.  What that means is that instead of buying on the dips an investor should find better opportunities.

I simply do not see Canopy Growth as a valuable opportunity right now.  They are valued too high relative to book, they do not have decent prospects of profitability in the near future, are likely to see market share dissipate, and generally, are losing too much money quarter after quarter.

I’ll continue to pass on Canopy Growth CGC stock.  Time is money.  And, this is a losing bet.

What are my favorite cannabis stocks?

Find out which are the best marijuana stocks to buy now!

This is a once-in-a-lifetime opportunity to get involved in cannabis investing and capitalize on a new industry that is booming… But, only some of the stocks are going to be real winners.

Here is what you get in a premium subscription:

Sign up Today!

Subscription Options

Digital Access

Unlimited access to all of the premium content.

$5.00 every month (recurring)

Recent Marijuana Stock Analysis

Here are the most recent marijuana stock analysis articles:

3 thoughts on “Canopy Growth CGC Stock and all that is wrong with it

  1. Your timing is good.
    Today about another half dozen analyst all lowered their price targets.

  2. Do you think Tilray can make it to the 50 dma on this bounce or will it give it up? If it does it will be in overbought territory, per rsi

Leave a Reply

Your email address will not be published.