3 Things to Know About Canopy Growth Stock After Earnings

Pot stocks are a riskier investment

In the aftermath of the cannabis stock bubble, we’re not left with all that much, as dashed hopes and dreams have been replaced by harsh realities. This is increasingly obvious in Canopy Growth Corp.’s (TSX:WEED) quarterly results that came out earlier this month.

Here are three things to know as we contemplate what to do next with Canopy Growth stock, a once high-flyer.

Canopy Growth is not what we expected (or hoped for)

The first thing to really wrap our heads around is the extent to which the reality of the cannabis market is different from the wildly optimistic expectations that surrounded legalization. In fact, it’s so different that this “growth” company is posting huge revenue declines. For example, Canopy posted a 28% decline in revenue in its latest quarter. Furthermore, Canadian cannabis revenue dropped 23% versus last year and 11% sequentially, as adult use has declined. Consequently, Canopy Growth stock continues to decline, which is not surprising considering these numbers. In fact, WEED stock is down 72% from its closing price at the end of 2021, and 95% from its 2018 highs.

At first glance, this might seem shocking. Yet, consider that analysts were initially estimating that the legal cannabis market size in Canada was $ 7+ billion – and this was being priced into the stock. Today, it’s clear that this number was wildly inaccurate for many reasons. For example, the illicit market is thriving, with an estimated 40% market share today. The legal market has had a difficult time being competitive due to taxation and the many regulatory hurdles that exist. The regulatory environment is so punitive that the sustainability of the legal sector has actually come into question.

Switching gears – consolidating into a consumer brand company

So today, Canopy Growth’s troubles reflect these sector troubles. Not only are revenues falling fast, but losses are also piling up. In response, the company has instigated broad changes. Clearly, in order to survive, something drastic has to be done. Thus, a restructuring is under way in order to realign resources with the reality of the market.

Canopy Growth is attempting to transform into a focused consumer brand company – a premium brand-focused cannabis and consumer packaged-goods company. This means consolidating, and reducing headcount and the number of products offered. It has resulted in the divestiture of the retail operations, 800 layoffs, and ultimately, a more focused company.

Two of the brands worth mentioning are BioSteel sports drinks and Storz & Bickel (S&B) premium vape offerings. BioSteel is a fast growing energy drink that has captured more than 10% market share in Canada, and 13.8% share in Ontario. So far in 2023, BioSteel’s revenue has more than doubled. Similarly, S&B vape products are seeing strong growth. In fact, revenue growth is ramping up quickly and it was a big profit contributor in the quarter.

The promise in WEED stock lies not in market size, but profitability

The growth strategy that was followed when cannabis was first legalized in Canada has been shelved as Canopy Growth has shifted the focus to profitability and sustainability. A necessary move, as the cannabis industry pie and growth that was anticipated did not come to be.

Moving forward, Canopy must focus on margins, profitability, and cash flow. The first step is to reduce its cash burn if the company wants to live to see another day. Right now, Canopy has $ 800 million in cash on the balance sheet. Last quarter, the company reported a $ 400 million cash burn.

If they can get this under control, then we can start thinking about the potential. For example, the Canadian medical cannabis market has been growing. Last quarter, revenue increased 9%.  International revenue has also been growing, with Australian sales up 200%. Finally, the S&B vaping business is a big profit contributor with gross margins of 45%, and BioSteel has the potential to achieve gross margins of 30% to 40%.

In conclusion, Canopy Growth stock is not for the faint of heart. But it never was. At least today, we know the risks that are out there and can make a more informed decision.

The post 3 Things to Know About Canopy Growth Stock After Earnings appeared first on The Motley Fool Canada.

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Fool contributor Karen Thomas has a position in Canopy Growth Corp. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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