Why Canopy Growth Is Down 45% From Its Peak

The largest cannabis company in the world by market capitalization, Canopy Growth (NASDAQ:CGC) has been on a bumpy ride this past month. Since hitting a high of $56.50 a month ago, CGC stock is down to $30.

Despite recent periodic short-term gains, it appears CGC stock has lost some momentum over the past month.

In this article, I’m going to discuss why I think this is the case.

U.S. Market Access a Big Deal Right Now

The potential for U.S. federal legalization has taken the cannabis sector parabolic since the fourth quarter. A political shift to a Democratic House and Senate stoked this sentiment. Accordingly, Canopy Growth has been a beneficiary.

At the state level, approximately one in three Americans lives in a state in which cannabis is legal. This has come as a result of recent news about Virginia’s passing of a bill legalizing recreational cannabis use. The first southern state to do so, investors are interpreting this step as a positive one for the passing of a federal legalization bill.

This bill has furthered investor excitement for cannabis stocks. Stocks jumped across the board. However, Canopy’s upside on good days for the cannabis sector has been much more muted than its publicly traded peers.

Many investors may ask why this has been the case.

I believe the real underlying reason Canopy is lagging its U.S. peers is simple. The company’s based in Canada, and because of listing requirements in the U.S., the company has foregone U.S. investments in recent years. Canopy is also crippled by existing banking regulations that exclude cannabis companies from receiving financial services presently.

This has made the company’s U.S. expansion more difficult than many of its peers such as Curaleaf Holdings (OTC:CURLF), a leading U.S. cannabis company.

Yes, Canopy has a deal in place to acquire U.S. peer Acreage Holdings (OTC:ACRHF) if and when cannabis is made federally legal in the U.S. However, right now, Canopy is locked out of the market directly.

Canopy’s large stake in American cannabis player TerrAscend (OTC:TRSSF) is another indirect way Canopy’s gaining momentum in this space.

Costly to Gain Traction In New Markets

However, investors need to consider the cost of Canopy’s expansion efforts. Because of the head start U.S. peers like Curaleaf have right now, Canopy’s in catch-up mode.

Indeed, the additional moves Canopy will need to make to become a major player in the U.S. market, lacking the head start its peers have, will cost a pretty penny. Stock prices have surged as a result of legalization expectations. What may have been well-priced and well-timed acquisitions a year ago now appear daunting. Growing organically takes time and money, both of which are in short supply as operating losses continue to mount for Canopy.

Acquiring stakes and having a plan in place to grow organically in the U.S. is great. As is Canopy’s recent announcement of a cannabis-infused beverage line targeted at the U.S. market. However, I think investors are worried these moves are simply not enough right now.

Patience Might be Wearing Thin With CGC Stock

Personally, I think cannabis investors aren’t waiting around to see who will be able to gobble up market share in the U.S. Rather, investors are focusing on companies like Curaleaf, with size, scale and a vertically integrated footprint from coast to coast.

As mentioned, it’s going to be extremely costly for Canopy from here on out to become a dominant global player in cannabis. Canopy’s Canadian business is great, but to be honest, the U.S. market is 10 times larger. Cannabis investors simply won’t care about the Canadian in a year from now if federal legalization materializes in the U.S.

It could take a year or more for federal legalization to take hold, if it materializes at all. That’s a long time for investors to wait for Canopy to hit the U.S. market.

Sometimes, a first-mover advantage is very valuable. This is certainly one of those cases.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.