Why Is Canopy Growth Stock So Cheap?

We see the U.S. government recognizing state legalization choices by the end of this year, which would allow interstate commerce.

Andrew Willis 24 February, 2023 | 2:20AM
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Andrew Willis: So, cannabis didn't turn out to be the next gold rush that many investors expected, at least not yet. First, it was the distribution issues in Canada and now bottom lines are hurting the sector's first billion-dollar unicorn.

Canopy Growth (WEED) has been experiencing earnings [EBITDA] losses for a few quarters now with lower sales leading to job and cost cutting plans. The developments have us slashing our fair value estimate from $14 to $8, while the stock price hovers around levels seen nearly a decade ago. While it's easy or perhaps preferable to forget about poorly-performing stocks in our portfolios, don't forget that those businesses are likely still active and looking for a profit. In the case of cannabis, Sector Director, Kristoffer Inton sees the U.S. Government recognizing state legalization choices by the end of this year, which would allow interstate commerce. So, perhaps, there's some growth left for companies like Canopy.

For Morningstar, I'm Andrew Willis.

bulls Bulls Say

  • Canopy Growth’s deal to acquire Acreage Holdings immediately upon U.S. federal legalization provides exposure to the largest potential cannabis market in the world.
  • Canopy Growth's ownership of 27% of Terrascend gives it further optionality for the U.S. THC market.
  • The investment by Constellation Brands and partnerships with Martha Stewart and Snoop Dogg provide potential expansion opportunities into infused products and topicals. If successful, Constellation Brands may increase its ownership or try to acquire Canopy.

bears Bears Say

  • While Canopy waits for U.S. federal legalization to enter the THC market there, U.S. multistate operators continue to grow bigger and become more competitive.
  • Canopy's U.S. assets look attractive, but access is limited without change to U.S. federal law. Meanwhile, its home market of Canada continues to be challenging.
  • States and countries have incentives to maximize tax revenue for products like alcohol, tobacco, and cannabis. Although alcohol and tobacco companies pass higher taxes onto consumers, cannabis companies lack the brand power to do the same.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Canopy Growth Corp4.56 CAD0.22Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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