Is Canopy Growth Stock Finally Setting Up for a Real Turnaround?

Canopy Growth (NASDAQ: CGC) has made considerable efforts to turn itself around. Over the past few years, the Canada-based cannabis company has significantly reduced its outstanding debt. It has also stacked up considerable cash.

Yet while Canopy is less indebted and more liquid than before, this recapitalization came at the cost of share dilution. Worse yet, while the balance sheet has improved, profitability, even on an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis, remains elusive. With this, uncertainty runs high, but a recent merger could change the story for Canopy, still one of the most-followed marijuana stocks.

Canopy and its continued dilution spiral

Over the past five years, Canopy Growth shares have declined by over 99.5%. In other words, a $10,000 investment made in May 2021 would be worth less than $50 today. The key reason for this severe destruction of shareholder value was the company's continued string of losses, coupled with Canopy's use of dilutive financing to cover them.

Even as losses narrowed, Canopy has continued to tap equity markets, diluting the stock's underlying value. The last big capital raise happened last August. That's when Canopy Growth raised $200 million through an at-the-market (ATM) equity program.

Canopy issued new shares and sold them on the open market. Again, this may have strengthened the balance sheet, but it has resulted in further severe losses for existing shareholders.

What could change the story?

Sometimes, share dilution can be worth it if the cash is used to improve a company's underlying performance. Yet while Canopy Growth has stabilized losses, the company still struggles with reaching profitability, even on an EBITDA basis.

That said, this could soon all change, and not necessarily because of possible external catalysts like U.S. federal legalization. Last March, Canopy completed its acquisition of MTL Cannabis. This merger could create millions in run rate cost synergies.

Canopy also plans to use MTL's production capacity to meet international demand for medical marijuana. Still, it may prove best to stay on the sidelines until Canopy's next quarterly earnings release on May 29. That day, the company could unveil better-than-expected results and provide further guidance on its path to profitability.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.