Has Canopy Growth Stock Risen Too Much Already This Year?

Shares of cannabis companies have been quite volatile in recent trading sessions. Several marijuana stocks, like Canopy Growth (NASDAQ: CGC), gained significant momentum last week on news that the U.S. Drug Enforcement Administration (DEA) might reclassify marijuana as a less dangerous drug, which might eventually lead to its legalization at the federal level.
Valued at a market cap of $1.03 billion, Canopy Growth stock has more than doubled in 2024, up 100.2% on a YTD basis. However, the Canadian cannabis giant still trades 46% below its 52-week highs, and 98% below all-time highs. Let’s see if the recent developments can help CGC stock stage a comeback in 2024 and beyond, or if the pot stock’s rally has gotten too hot.
According to a detailed report from The Associated Press, the reclassification proposal of marijuana still has to be reviewed and approved by the White House Office of Management and Budget (OMB), which suggests the path towards legalization may still be very long and winding from here. After the proposal is approved by the OMB, the DEA will take public comment on the plan to remove marijuana from its current classification as a Schedule I drug – a category that includes substances such as heroin and LSD. Following review by an administrative judge, cannabis could then be reclassified as a Schedule III drug, alongside ketamine and anabolic steroids.
According to Ed Groshans, a senior policy and research analyst at Compass Point, there is just a 20% chance that this lengthy rescheduling process will be finalized before the upcoming elections – adding a major risk factor. Groshans explained, “If Biden wins reelection, the rule will get finalized and marijuana will get placed on Schedule III subject to the outcome of likely litigation. If Trump wins, we do not expect a DEA final marijuana rescheduling rule to see the light of day.”
While Canopy Growth is among the largest cannabis producers in Canada, it has yet to report consistent profits. In the last five years, Canopy Growth has been wrestling with headwinds such as an oversupply of products, overvalued acquisitions, high inventory levels, competition from new players, and illegal sales. In the third quarter of fiscal 2024, Canopy Growth reported net revenue of CAD$78.5 million, down 7% year over year. It remains unprofitable and reported a net loss of CAD$216.8 million, narrower than its prior-year losses of CAD$264.4 million.
Canopy Growth recently created a special-purpose vehicle in the U.S. called Canopy U.S.A., allowing it to kickstart operations in the world’s largest cannabis market. The new business will acquire cannabis brands such as Acreage (ACRHF), Jetty, and Wana. Canopy Growth will own a non-controlling equity interest in Canopy U.S.A. Even if the U.S. legalizes marijuana at the federal level, Canopy Growth will have to compete with established players such as Green Thumb Industries (GTBIF) and Cresco Labs (CRLBF). Compared to their Canadian peers, U.S.-based marijuana producers have stronger balance sheets and enjoy an entrenched position in several billion-dollar markets.
Out of the 10 analysts covering CGC stock, one recommends “strong buy,” four recommend “hold,” one recommends “moderate sell,” and four recommend “strong sell.” The mean target price for CGC is $4.45 – a discount of 56% to Friday’s close. Canopy Growth is a high-risk investment option, given its weak financials and negative profit margins. The marijuana producer has yet to report consistent profits and steady revenue growth to regain investor optimism and become a viable option for long-term shareholders. Given that, the consensus rating of “moderate sell” seems about right for CGC stock.