Following an initial surge to all-time highs in October 2018, shares of a prominent cannabis company currently trade nearly 98.6% below peak levels. Investor confidence soared following Canada’s legalization of recreational marijuana in October 2018. However, the Canadian cannabis industry has since grappled with various challenges, including heightened competition, oversupply of products, high inventory levels, and negative profit margins.
Several marijuana producers facing substantial cash burn rates were compelled to raise equity capital multiple times, resulting in significant dilution of existing shareholder wealth. Additionally, established players, including the aforementioned company, pursued acquisitions at inflated premiums to expand their market share and manufacturing capabilities. Consequently, overvalued acquisitions led to substantial goodwill impairments worth billions of dollars in recent years.
With a market capitalization of $911 million, the company’s stock has significantly eroded investor wealth in recent times. The future trajectory of the cannabis stock remains uncertain, and potential for a recovery in 2024 is unclear.
Despite efforts to mitigate losses, the company reported a net loss of $675.8 million on sales of $297.1 million in fiscal 2024. Operating losses surpassed sales figures, indicating a significant distance from profitability. While investors often invest in unprofitable ventures with hopes of future growth, the company’s modest 7% increase in sales during the fiscal Q4 of 2024 suggests a challenging path to profitability.
As anticipation grows for potential marijuana legalization in the United States, cannabis stocks, including the aforementioned company, have gained momentum in 2024. The company’s shares have climbed 40% year to date, buoyed by expectations of the U.S. reclassifying marijuana from a Schedule I drug. To position itself in the U.S. market, the company established a distinct entity called Canopy USA, primed for a potential merger pending federal legalization.
While the prospect of legalization presents enticing opportunities, the company must contend with well-established multi-state operators and fierce competition from industry peers already generating consistent profits. One such company, Green Thumb, stands out as a more appealing investment option given its profitability and positive free cash flow.
Analysts’ forecasts suggest a gradual reduction in the company’s loss per share over the coming years, albeit several quarters away from profitability. With a 12-month average target price of $9.13 for the company’s stock, marginally surpassing its current price of $8.90, the risk-reward profile remains less favorable compared to other fundamentally strong investment options available in 2024.
