Of the many varied and captivating businesses in the cannabis sector, Canopy Growth (CGC 2.41%) is one of the more dynamic competitors. With the company recently abandoning its home market to try to enter the U.S., core elements of its strategy and positioning are still in flux. That makes now an interesting, if significantly riskier, time to invest.
But how did the shareholders of the past fare with their investment? Let's settle this issue by calculating how much a $5,000 investment in this company made five years ago would be worth today. Then, we'll assess its probable future trajectory to see if it's appealing to purchase.
It's been a brutal ride
The five years between December 2018 and today have been difficult for Canopy for several reasons. First, it overextended itself when trying to seize market share in the hot Canadian cannabis market throughout 2019 and 2020, building up too many manufacturing facilities and retail outlets for the long-term level of demand. That set it up for deep unprofitability, which has proven quite hard to shake despite efforts to shed excessive overhead and orient itself toward the markets where it expects to see the most growth.
For management, the growth market was clearly the U.S. rather than Canada, as cannabis legalization could provide a major catalyst in the U.S. if it ever happens. Canopy's strategy was thus to arrange a series of acquisitions of U.S.-based operators via a parallel holding company while exiting its Canadian retail operations. That hasn't gone as planned. Though its retail outlets are gone, its access to the U.S. market remains stymied in a regulatory limbo, and full legalization is nowhere in sight either. It's still selling off unprofitable business units in an attempt to bring its expenses in line with revenue.
With so many setbacks, it's no surprise that the stock hasn't performed well. If you'd made an investment of $5,000 in Canopy Growth stock in late 2018, today you'd have a grand total of $93, after suffering a brutal decline of more than 98%. But the stock's trajectory wasn't exactly an uninterrupted slow collapse, nor was it a rapid crash. Instead, shareholders experienced two big run-ups where their shares would have been worth around $8,000 at each peak. Since the second peak, in early 2021, it's all been downhill, and over the last three months alone, the stock fell 51%.
Will the future be better?
We've established that Canopy Growth has been a money-burning investment for long-term shareholders. But after losing so much of its value, could it be the case that things will eventually start to look up once again?
Unfortunately, it doesn't look good right now. The company's drive toward efficiency has occurred at the cost of missing out on revenue. Its trailing 12-month (TTM) sales fell by 31% over the past three years, reaching $262 million. It remains deeply unprofitable, and there is no indication that any of its products are popular enough to constitute a competitive advantage that can prevent its market share from being stolen by other players. Its share price is now so low that it just completed a reverse stock split to stay listed on exchanges and keep its share price above $1.
Even if cannabis were federally legalized the U.S. tomorrow, Canopy Growth would be at risk of making the same mistakes it did in Canada, and profitability would be even further away.
Its TTM operating expenses are $268 million, and its cash and short-term investments total only $199 million. In other words, it probably needs to shrink more to stay alive. It's hard to imagine how the next five years could be as bad for shareholders as the last five were, but without significant changes, there's a good chance that the future will be almost as difficult as the past.
