In Q3 2020, Canopy Growth (NASDAQ:CGC) reported year-over-year quarterly growth of 76.6% and revenues of $101.6 million. Fast forward a few years and that financial highlight appears distant in the rearview mirror because, in its most recent quarter, revenues came in at just $82.1 million.

Indeed, in 7 of the past 12 quarters revenues have gone backwards, so what does the future hold for Canopy Growth, where will CGC stock be in 5 years?

Rapidly Growing Market

Canopy Growth has one really strong tailwind supporting its growth and that is market size, which is accelerating quickly. By 2027, it is forecast to hit $73 billion, a growth of over 300% in the pace of less than a decade. Simply keeping pace with its existing market share would translate to higher revenues.

But the growth is not without its fair share of bumps in the road, particularly those stemming from regulations. Yes, cannabis legalization has been sweeping the country but not at breakneck speed. What players in the space have really been waiting for is a Federal stamp of approval.

With its existing infrastructure, Canopy Growth stands to be among the biggest winners of such pan-national legalization. So far, the sluggish pace has anchored Canopy’s ambitions to ignite its top line revenues.

Nevertheless, management has been successful in building partnerships with brand-name firms, like Constellation Brands (NYSE:STZ), who has provided both capital and distribution opportunities. 

It’s also done an admirable job in diversifying products and therefore revenues by introducing vapes and edibles so its offerings are tailored to varying consumers preferences.

Given regulatory concerns, geographic diversification is important for Canopy, and there, too, the top brass has done a good job by breaking into emerging markets.

Financial Health

While the top line has gone backwards over the past few years, Canopy has improved its operating income by saving on costs.

Three years ago, EBIT, or operating income, was in the red to the tune of $104 million. Most recently that figure was reduced to -$60.6 million.

What’s concerning, however, is the backward slide in liquid assets. 36 months ago, Canopy had $505 million in cash and $802 million in short-term investments, resulting in a combined $1.3 billion in liquid reserves.

As of Q2 2023, that figure fell to just $432 million. Worse still, total debt had been $508 million but has now ballooned to $856 million.

For investors the big question is whether Canopy Growth can survive the worsening financial health punctuated by less cash and more debt.

Canopy Growth Seasonal Trend?

Canopy Growth has displayed a historical trend of popping in Q1 and Q4, meaning that we’re entering a period when the stock historically has outperformed.

The first week of December to mid-February has tended to be the best seasonal period for the stock during the year.

Valuation Overly Ripe

Though technically there might be a bright spot on the horizon near-term, fundamentally analysts have really serious concerns about the future prospects of the firm.

The company has been burning through its liquid reserves and analysts have placed a fair value on the firm of just $0.63 per share, which would suggest close to 25% downside risk from the present trading levels.

Even though the company has successfully cut costs as revenues fell, it’s simply not been enough to turn operating income positive, and losing $60 million quarterly with $432 million in dry powder suggests the end of the runway could be close up ahead.

For bulls that should halt them in their tracks. They can cling to arguments of federal legalization, geographic and product diversification, but it may not be enough to counteract the cash burn rate let alone the competitive pressures.

Conclusion

Canopy Growth was one of the big winners in the emerging cannabis industry but it hit a brick wall post-2020 financially when revenues began to slide backwards, cash and short-term investments reserves fell, and debt levels rose.

CGC share price fell in tandem with the increasingly poor sentiment of investors and Wall Street as a whole. Downgrades soon torpedoed the stock further to the point where, even after a monumental share price slide, analysts’ consensus forecasts imply an additional 25% downside risk.

So that brings us to the question where will Canopy Growth stock be in 5 years? Unless management can slow the cash burn rate substantially, it’s likely that the company will go out of business or issue a secondary stock to replenish cash reserves.

Another possibility is that the company puts itself up for sale and is acquired by one of its strategic partners, such as Constellation Brands.

Management is clearly making a concerted effort to lower operating costs, and the initiatives have been effective but whether they are too little too late remains to be seen.

For now, the future viability of Canopy Growth as a going concern remains very much in doubt. Any investment at this stage would fall firmly into the bucket of a speculative investment, and perhaps even a pure gamble.

Conservative investors would do well to look at more financially sound companies with stronger balance sheets and revenues headed north versus south.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.