Canopy Growth shares plunge after analysts' warnings

Canopy Growth stock fell 10% last week after Rupesh Parikh, an analyst at the investment bank Oppenheimer, warned that investors should brace for heavy losses in the coming years.

Rupesh Parikh expects Canopy Growth to post losses of more than $500 million over the next two years, with the company’s return to profitability further off than many investors hope.

Canopy Growth is currently the largest cannabis company by market capitalization and a popular stock among cannabis investors, partly because of the company's substantial cash reserves. Canopy's financial strength stems primarily from the investment by $4 billion generated by Constellation Brands, which enabled the beer giant to hold nearly 40% of the cannabis producer.

Canopy’s operating losses are, however, reducing its cash position. Canopy generated a negative operating cash flow of 158 million Canadian dollars and a negative free cash flow of 372 million Canadian dollars in the last quarter. The company has struggled with both supply shortages in some markets and oversupply issues in others. This has led to revenue losses and lower margins. It is also acquiring companies at a rapid pace, an investment strategy that will strengthen its results in the medium to long term.

These problems have also caused upheaval among Canopy's leadership. Co-founder and co-CEO Bruce Linton, was ousted in July, partly due to Constellation Brands' frustration with Canopy's mounting losses. A new CEO has not yet been named

Despite this uncertainty regarding Canopy’s profitability, Rupesh Parikh predicts that the company’s shares will still trade at seven times its estimated 2021 revenue. For these reasons, the analyst recommends that investors hold off on buying shares until their valuation improves, but has declined to set a price target at this time.