For years, Canopy Growth (CGC 6.46%) has been a figurehead atop the fast-growing marijuana industry. The company's aspirations have always been aggressive, looking to lead the industry not just in its home base of Canada but around the world. It was the first big pot stock in 2017 to attract a notable investor from another industry, in beer maker Constellation Brands. It even has a deal in place with multistate operator Acreage Holdings which will close once marijuana is legal in the U.S.
Although those developments happened under founder and former CEO Bruce Linton's watch, new CEO David Klein (who came over from Constellation) doesn't look any less aggressive or bullish on the industry. And if his latest two predictions come true, Canopy Growth's stock could become an ultra-hot buy.
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Prediction 1: Canopy Growth will enter the U.S. THC market this calendar year
Previously, Klein was projecting that the Ontario-based cannabis producer will be operating in the U.S. within the next 12 months, potentially in 2022. But now he's even more bullish and believes Canopy Growth will be in the U.S. tetrahydrocannabinol (THC) market as soon as this calendar year. Technically, the company does have a presence in the hemp market (as those products are federally permissible in the U.S.). But hemp-based products are low in THC and don't give marijuana users the high many of them are looking for. Entering the THC market could open up the floodgates for Canopy Growth, especially since it already has a partner waiting in the wings.
There's reason for optimism that marijuana reform could be coming after Georgia's runoff election results last month giving Democrats a 50-50 split in the Senate, with Vice President Kamala Harris potentially being a tie-breaking vote. Democrats have typically been more favorable of marijuana reform than Republicans, who are more conservative and harder on drugs. In December 2020, the Democratic-controlled House passed a bill that would decriminalize marijuana.
But passing legislation that would allow Canopy Growth to enter the U.S. THC market would require outright legalization (or something close to it). And for that to go into effect within the current calendar year is definitely a best-case scenario for the industry, especially since politicians have many important issues to focus on, including the rollout of coronavirus vaccines.
Legalization would certainly help Canopy Growth's top line and that may be why Klein is also projecting the following:
Prediction 2: The company will be profitable before the end of the next fiscal year
Profits in the cannabis industry aren't all that common and sometimes are fleeting. Rival Aurora Cannabis promised profitability in the past and, although it has made progress in strengthening its bottom line, it has failed to stay out of the red and delayed its most recent timeline for profitability.
Canopy Growth isn't doing a whole lot better as it released its third-quarter earnings report on Feb. 9, and it posted an adjusted EBITDA loss of 68.4 million Canadian dollars for the period ended Dec. 31, 2020. That was, however, an improvement from the prior-year period when it incurred a loss of CA$97 million. And the company says it expects to reach profitability in the second half of the next fiscal year. That means sometime over the next 12 to 15 months, investors should see a profitable quarter.
But the problem I see with that goal is that if Canopy Growth does enter the THC market in the U.S., that could actually worsen its prospects for profitability since that will likely mean it will spend more money on expansion to take advantage of its new and exciting growth prospects. It also doesn't help that Acreage has incurred adjusted EBITDA losses totaling $26 million over the past three quarters.
Are these goals too lofty?
Both of these targets are extremely aggressive. If I were an investor in Canopy Growth, I would be worried this might set the expectations for the company too high. And that could set the stock up for a sell-off if it fails to turn a profit next year or efforts to legalize marijuana stall or don't go far enough to permit Canopy Growth to complete its acquisition of Acreage.
In the past year, shares of Canopy Growth have more than doubled while the Horizons Marijuana Life Sciences ETF is up 80% over the same time frame. With a market cap of $15 billion -- which is almost more than multistate operators Curaleaf Holdings and Trulieve Cannabis combined -- there's already pressure on the company to perform. Throwing some aggressive targets and expectations into the mix will only make things more challenging for the business to succeed and as a result, makes Canopy Growth an even riskier pot stock to hold right now.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
