Can Canopy Growth Survive Another 5 Years?

The hope for many Canopy Growth (NASDAQ:CGC) investors is that in the long run, there will be a big payoff from the stock. Once the U.S. legalizes marijuana, the Canadian-based company will generate significant growth, become the behemoth they expect it to be, its valuation will rise, and their losses will turn into gains.

The problem is that it's full of assumptions. Legalization is by no means a guarantee, and it's definitely not on the horizon. Canopy Growth, meanwhile, would still face plenty of competition in the U.S. market, even if it were able to access it. The company's problems wouldn't be fixed simply because a new market opened up.

The long-term picture may be exciting in the best-case scenario, but the bigger question investors should be asking today is whether Canopy Growth will still be around in five years, and whether the cannabis company will be around long enough to profit from future opportunities.

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Canopy Growth has continued to incur steep losses and burn through cash

I've written about Canopy Growth for several years, and it's always been the same old story: lots of long-term hope, but little in the way of proof that it's actually doing well and that it has a path to profitability.

The key number for investors to look at is cash flow. This is a better reflection of how the business is doing than what the income statement shows, which can be skewed by non-cash items, including impairment and revaluation items.

In its most recent quarter, which ended on June 30, Canopy Growth once again burned through cash, with its operating cash flow totaling a negative 25 million Canadian dollars. A year ago, it used up CA$10 million.

The sobering sign is that with cash and cash equivalents totaling CA$336.6 million as of the end of the period, the burn rate is sustainable enough that the business isn't in any imminent danger of running out of cash.

The company should survive another five years, but it may not live on as it does today

Canopy Growth has been able to continually raise cash, and with a solid amount on its books and a manageable burn rate, I don't believe it's in a perilous position. However, that doesn't mean that it might not end up getting acquired in the future and end up part of another business.

The stock has already lost 99% of its value in five years. Its shrinking valuation could make it inevitable for an acquisition to take place, for a company to acquire it for its assets. But as an investment, this is still a stock that investors are better off steering clear of, due to the significant risk that it carries.

David Jagielski, CPA 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.