Canopy Growth's Stock Just Dropped -- Here's Why I'm Still Not Buying

For anyone who has observed Canopy Growth (NASDAQ: CGC) during the past few years, it won't be shocking to learn that the marijuana company's stock is diving in May. Since the start of the month, it's down by more than 12% as of this writing, against the nearly 2% gain of the bellwether S&P 500 index.

Years of net losses and struggles with sales growth have taken their toll on investor sentiment. Yet there are Canopy Growth bulls in the investing community that point to a recent acquisition, in particular, as a cause for hope.

I'm not buying that view, and I'm not buying the company's stock. Read on for why.

A business full of headaches

The company's home country, Canada, began full legalization of recreational weed in 2018. That was also the golden era of cannabis companies, as investors flocked to weed stocks at the dawn of this seemingly glorious new market.

Except that the market wasn't so impressive. Regulatory bottlenecks in Canada hampered its development, while persistent gray- and black-market competition and oversupply left the company constantly struggling. At least it wasn't alone in that respect; north-of-the-border peers like Tilray Brands have also had a tough time prospering in such an environment.

The vast and wealthy U.S. market -- where Canopy Growth has a presence through its Canopy USA affiliate -- is always tantalizing. This is more promise than reality, however. De facto legalization is frustratingly piecemeal, and reform has occurred in fits and starts, at best.

So, in both its home country and here, Canopy Growth remains challenged to eke out any growth and reduce the flow of red ink on the bottom line. Over the years, it has tried numerous times to shore up its finances with fresh secondary-share issues, but the dilution has been significant for existing shareholders and has driven away potential investors.

CGC Shares Outstanding data by YCharts.

Going the acquisition route

In March, Canopy Growth closed its acquisition of Quebec-based medical marijuana company MTL Cannabis. The notable factor in this deal is that MTL is an outlier: It's a pure-play weed company that has posted more than a few bottom-line profits.

On that basis alone, investors were excited about its potential to improve Canopy Growth's financials. I'm not as impressed; I don't think the deal -- paid with a mix of cash and stock and valued at $125 million Canadian dollars ($91 million) -- will be a game changer for the buyer.

In MTL's four reported quarters leading up to the acquisition, its gross product revenue ranged from just under C$15 million to nearly C$19 million. In two of the four quarters, it posted net income, with those profits coming in just shy of C$490,000 and slightly more than C$1 million.

Meanwhile, if we look at Canopy Growth's latest quarterly results, the pot company's top line was C$54.5 million, and its net loss (which, to give the company its due, was considerably narrower than the prior-year shortfall) amounted to almost C$45.8 million.

So even when MTL posts bottom-line profits, these surely won't do much to mitigate the chronic and deep losses of its new parent.

Not so high on the sector

Given that, I predict more dilutive share issues for Canopy Growth, as this is the company's classic go-to reaction to financial stress. I don't see many accretive deals for it in the future -- its resources are limited, and it's doubtful there are scores of (at least occasionally) profitable operators in the market ripe for acquisition.

I also don't envision the numerous challenges in Canada dissipating anytime soon, if ever. The U.S. might never enact a complete national legalization of recreational marijuana. Yet even if it does, the country has more than its share of domestic weed companies that would pounce on any meaningful legalization move.

Plus, those U.S. companies just got a break from the federal government, which last month rescheduled medical pot to a more lenient status. This change included the elimination of the Internal Revenue Service's Section 280E rule -- a move that drastically eased the tax burden on the country's multistate operators.

So, in sum, there are numerous compelling reasons to stay away from Canopy Growth stock specifically, and -- save for a very few clever companies -- the broader marijuana sector generally. There are better places to park our precious investment money.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.