Over the past three years, Canopy Growth shares (NASDAQ: CANOPY) have been on an almost continuous decline, losing a staggering 98 percent of their value during this period. But after the Canadian cannabis company’s shares fell to a new all-time low ten days ago, Canopy Growth’s share price has almost tripled in the last few days. What’s behind the sudden fireworks display?
ℹ️ Canopy Growth introduced
- Canopy Growth is a company founded in 2014 that creates cannabis for medical applications.
- It is based in Smith Falls, Ontario, Canada.
- The major shareholder is the beverage company Constellation Brands, with around 35% of the shares.
- Canopy Growth is listed on the Toronto Stock Exchange and the New York Stock Exchange and is worth approximately CA$950 million.
Good news from the USA…
There are two positive developments that have given Canopy Growth shares and other cannabis stocks enormous tailwind in the last few days. The first of these occurred in the USA.
Last Friday, none other than US Vice President Kamala Harris called for a reclassification of cannabis in the USA. The US Department of Health had already recommended that the US Drug Enforcement Agency (DEA) reclassify cannabis in August last year. The DEA currently classifies cannabis as just as dangerous as heroin and other hard drugs, which contradicts scientific evidence.
Whether the public pressure from the US Vice President will influence the DEA in its examination and decision on the risk classification of cannabis cannot be assessed from the outside. But for cannabis companies, it’s undoubtedly a very welcome statement.
…and from Germany
The second price driver for Canopy Growth shares is the Federal Republic of Germany. At the end of last week, the law for the partial legalization of cannabis passed the Federal Council and can therefore come into force on April 1st.
The law stipulates that the possession and consumption of cannabis as well as the cultivation of cannabis plants by adults will remain unpunished in the future, subject to certain restrictions. Federal Health Minister Lauterbach wants to curb the flourishing black market in the private sector through this partial legalization.
However, the commercial trade of cannabis is still prohibited. Cannabis can only be traded by members in clubs under certain conditions. The extent to which Canopy Grwoth and other cannabis companies can benefit from the new German drug policy is still largely unclear.
Is the recovery sustainable?
With the recent price increase, Canopy Growth shares have broken the downward trend that has been ongoing since the beginning of December. The next important resistance is at US$8.
If the breakthrough succeeds here too, a sustainable upward trend could develop.
The proof of concept is missing
Despite the two pieces of good news for the cannabis industry, I’m still very skeptical of Canopy Growth. The company has not yet provided a proof of concept of its business model.
In the last two fiscal years, Canopy Growth’s sales fell by a total of 26%. What’s even more serious is that the company simply can’t make any money. In recent years, expenses have been more than double sales, resulting in an operating loss higher than sales.
As an investor, you can accept such high losses in a rapidly growing company that has a clear roadmap to profitability. There is no sign of this at Canopy Growth.
I assume that the DEA will take a long time to examine the cannabis risk class. The issue is too explosive in the USA to be decided before the presidential election. And for me, the partial legalization of cannabis in Germany is not a strong price driver for Canopy Growth shares.
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Peter Wolf-Karnitschnig
Peter has been involved in the international financial markets for over 20 years. He started trading stocks while studying international economics. For several years, Peter has been sharing his personal know-how as a financial editor, particularly in the technology, internet and biotech sectors.
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