WLTW

Willis Towers Watson Public Limited Company

231.56
USD
-1.19%
231.56
USD
-1.19%
197.63 271.87
52 weeks
52 weeks

Mkt Cap 28.85B

Shares Out 124.61M

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Canopy Growth Plunges, Profitability is Still Years Away

Marijuana stocks, like Canopy Growth (CGC), are sometimes regarded as one of the biggest speculative ventures around. The product is technically illegal in some places. Worse, a crazy quilt of state and federal laws makes it hard to tell where marijuana stocks can actually do business. With these points in mind, it's not surprising to see that Canopy Growth posted a disastrous earnings report. Canopy Growth lost 10.5% in Friday's premarket trading, and the losses continued into Friday's trading session. I'm moderately bearish on Canopy Growth. There's a path to victory for this company, but to get there, it's going to have to fend off a horde of competitors and do so quickly. The last 12 months for Canopy Growth have all been pretty much downhill. The company kicked off this time last year at around $25 per share. It's lost about 80% of that value over the year, currently trading just under $5 per share. The latest news will prove little help in sparking a recovery. The company's earnings report showed that the company posted a loss of C$578.6 million (roughly $454.18 million USD), or around C$1.46 per share. That's somewhat improved from the figures this time last year, when the company posted a net loss of C$616.7 million (roughly $484.2 million USD). Revenue, meanwhile, also faltered. The company posted C$111.8 million in net revenue. This was also a decline from this time last year, in which the company posted C$148.4 million Canadian in revenue. In perhaps the most distressing part of the earnings report, the company noted that it retained the top ranking in the "premium flower category" and that it expected to achieve profitability in Fiscal Year 2024. Wall Street's Take Turning to Wall Street, Canopy Growth has a Strong Sell consensus rating. That's based on two Holds and seven Sells assigned in the past three months. The average Canopy Growth price forecast of $5.36 implies 9.8% upside potential. Analyst price targets range from a low of $4.31 per share to a high of $6.67 per share. Investor Sentiment Has Its Own Highs and Lows To suggest that Canopy Growth is in trouble isn't out of line. The company currently holds a Smart Score of 2 out of 10 on TipRanks. That's the second-lowest level of "underperform." That makes it more likely than not to lag the broader market. A look at several indicators of investor sentiment demonstrates the problems Canopy Growth is facing from within. However, some unexpected bright spots will also emerge. The biggest of these unexpected bright spots is hedge fund involvement. The TipRanks 13-F Tracker shows that hedge funds got back in CGC in a big way between the last two quarters. Hedge funds hiked involvement from 31,514 shares in December 2021 to over eight times that number—250,168—in March 2022. Even as hedge funds bought, insiders sold - in a big way, too; insider trading at Canopy Growth has been heavily sell-weighted for months. April saw no transactions recorded. Yet, the last three months show sell transactions beating buy transactions 16 to four. For the last 12 months, there were 48 sell transactions and 12 buy transactions. Retail investors—at least those who hold portfolios on TipRanks—weren't sticking around either. While TipRanks portfolios that held Canopy Growth dropped less than 0.1% in the last seven days, that number increases to 0.8% when looking at the last 30 days. It will, therefore, likely surprise few that Canopy Growth's dividend history does not exist, nor does it show signs of starting. Canopy Growth is likely too busy covering losses to redistribute what income it has to investors. Two Years Until Profitability Canopy Growth makes its growth trajectory fairly clear, which is part of the larger problem facing this company. It looks to spend the 2023 Fiscal year "executing...[its] path to profitability in Canada". It will also "further develop...[its] U.S. THC ecosystem," which it considers "significantly under-appreciated by the market." The company is burning through its cash reserves at a staggering rate. Reports noted that, at this time last year, the company had $2.3 billion Canadian in cash and short-term investments. Fast-forward to March 31, when the quarter ended, and that number dropped to $1.4 billion Canadian. At that burn rate, Canopy Growth will be completely out of cash before the end of Fiscal 2024. Thankfully, the company has engaged in some cost-cutting measures. However, burning through a shade under a billion bucks a year, even Canadian, is still a nightmarish burn rate. As for the "U.S. THC Market," I wouldn't look for that to save Canopy Growth any time soon. Leave aside the fact that the U.S right now is a bizarre pastiche of complete legalization and complete criminalization, with just about every stance in between represented. In those places where it's legal in any capacity, individual shops and growers are already stepping in. Bank of America Securities already notes that cannabis sales in the U.S. are up 40% in 2021 alone, hitting $25 billion. Canopy Growth will likely have a tougher time competing in an established market. Thankfully for Canopy, the market is growing. A Gallop poll reveals that almost half of U.S. adults have tried marijuana. That's the highest proportion yet, and a sign that there could be a brisk market for marijuana in the U.S. That assumes, of course, that all 50 states get in on the prospect. As of February 2022, 19 states and the District of Columbia have completely legalized marijuana for adults. In 38 states, medical marijuana is available for use. That could represent future potential gains, but is that enough for Canopy Growth to build on? Concluding Views Even assuming that Canopy Growth can achieve its vision of profitability in Fiscal 2024, how many investors will get in right now? It's true that Canopy Growth shares are cheap right now. When 200 shares equal the price of a decent television, investors may prove interested in taking a chance. Some investors will instead prove encouraged to wait. Why buy in now when profitability is still two years out? There's not much sense in buying in now when the price could fall still further and potentially allow shareholders to double their investment for the same dollar cost. Regardless, I'm bearish on Canopy Growth. There are too many problems for this company to face. Its hoped-for profitability is so far out you can't see it from here. Competitors abound and only get thicker on the ground. Canopy's ability to break in to any significant degree is limited. That makes its dream of profitability look much more like just that. A dream. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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