Canopy Growth(NASDAQ: CGC) has struggled to grow its business over the years while also trying to improve its prospects for profitability. Despite its challenges, there's no doubt this remains one of the most iconic stocks in the cannabis industry today.
Investors only need to look at the stock anytime there's excitement around the prospects for marijuana legislative reform or legalization in the U.S., and its soaring share price, to know that it's often a go-to stock for those who are bullish on the industry's long-term prospects.
But will that trend continue over the next five years? Will Canopy Growth still attract the attention of cannabis-focused investors, or will other stocks take over? Here's a look at where the business may be in five years, and whether there's a case to be made for investing in the struggling pot stock right now.
Marijuana reform could do more harm than good for Canopy Growth
One of the ironic situations for Canadian-based Canopy Growth is that investors usually pile money into the stock when there's hope of marijuana reform taking place in the U.S., but that might not actually end up helping the stock in the long run. Canopy Growth has been staking out positions in U.S. cannabis companies, and it even created a special purpose vehicle, Canopy USA, to execute on those deals without jeopardizing its listing on the Nasdaq Stock Exchange (cannabis remains illegal federally, so Canopy Growth can't actually acquire U.S. marijuana companies without running afoul with the exchange), but the long-term effects are more complicated.
If there is marijuana reform on the horizon, whether it's through outright legalization or simply rescheduling cannabis down to a less dangerous substance, the immediate benefits may flow to multi-state marijuana operators such as Curaleaf Holdings, Trulieve Cannabis, and other cannabis stocks. Marijuana reform could free up the path for these companies to more easily transport cannabis across the country, and it would likely pave the way for these stocks to uplist onto the Nasdaq or New York Stock Exchange. If they become more easily accessible to investors and are available on major exchanges, Canopy Growth may lose the one big advantage it currently has over these stocks.
While Canopy Growth will have its own growth opportunities to pursue if legalization takes place, it would also face plenty of competition in the U.S. market, which isn't great news for a company whose financials aren't all that strong right now.
Lack of Constellation Brands support puts more pressure on Canopy Growth
A potentially more concerning development for Canopy Growth is that beer maker Constellation Brands is distancing itself from the cannabis company. It poured $4 billion into Canopy Growth back in 2018 when it saw cannabis as a big growth opportunity. But after continual losses and a lack of growth, Constellation has pulled back on that strategy, no longer committing to help fund the struggling marijuana entity.
And that's a potentially massive problem for Canopy Growth. The company finished its most recent fiscal year (it ended on March 31) with 170.3 million Canadian dollars in cash and cash equivalents. Meanwhile, during the fiscal year, it used up CA$228.4 million over the course of its day-to-day, continuing operations. The writing is on the wall: If Canopy Growth's financials don't improve quickly, investors should brace for lots of dilution.
Without significant funding from Constellation Brands and that money drying up over the years, frequent stock offerings will likely become the new normal for Canopy Growth. And last month, the company announced a planned stock offering worth $250 million to help fund anything from acquisitions to general corporate purposes.
Canopy Growth's future looks as abysmal as ever
In the past, I saw Canopy Growth as being one of the safer pot stocks because of its partnership with Constellation. Without strong financial support from the company anymore, I'm not sure Canopy Growth can survive another five years, let alone remain a top cannabis stock.
There's simply too much work for the cannabis company to turn things around, become profitable, and grow its operations to expect that it will still be a major player in the industry in five years. The more likely scenario I see is that another company ends up acquiring it. Canopy Growth has been a risky stock to own in recent years, and I don't expect the next five years to be any better for investors.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Brands and Trulieve Cannabis. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
