If you just want to trade a potential short-squeeze stock for a quick flip, Canopy Growth (NASDAQ:CGC) stock might be what you’re looking for. However, serious long-term investors should be wary of Canopy Growth as the company’s fundamentals aren’t ideal.
Sure, the Canopy Growth share price might get a bump if cannabis is fully legalized in the U.S. Or, the meme-stock traders might target Canopy Growth and some lucky shareholders could accidentally catch a windfall.
These are gamblers’ considerations, however. Sensible investors need to consider Canopy Growth’s problems before they risk their hard-earned money on CGC stock.
Canopy Growth’s Failing Business Venture
At one point, it probably seemed like a brilliant idea for Canopy Growth to diversify its business model and develop a sports nutrition product segment. However, that business unit, known as BioSteel, hasn’t been a resounding success.
According to a Reuters report, Canopy Growth is “facing an investigation from the U.S. Securities and Exchange Commission over the reporting of revenue from BioSteel.”
Canopy Growth had reportedly “launched an internal review in June for BioSteel” and ended up letting go of “several members of the segment’s leadership team following completion of the assessment.”
And just recently, Canopy Growth disclosed that it “has ceased funding” for BioSteel. The company’s press release tried to spin this event in a positive light, but it’s clearly a business failure.
Moreover, BioSteel is seeking creditor protection under Chapter 15 of the U.S. Bankruptcy Code. Canopy Growth’s management might call this a “major milestone in our transformation plan.”
But what the company might call a “milestone,” investors with common sense would probably call a disaster.
CGC Stock Traders Must Read the Fine Print
What the aforementioned Reuters report put in a headline, Canopy Growth apparently tried to bury in the fine print of its first-quarter fiscal 2024 financial report. I’m referring to the ominous phrase “going concern,” which Canopy Growth’s earnings report mentions several times.
Reportedly, Canopy Growth had previously raised doubts about its ability to continue as a going concern in June. It’s certainly not a good sign if Canopy Growth was still using the “going concern” phrase in August.
To be fair, Canopy Growth narrowed its earnings loss. Specifically, the company’s net loss shrank its Q1 FY2024 net loss to $42 million, and that’s $2.050 billion less than the net loss from the year-earlier quarter.
Canopy Growth is still losing money. The company’s free cash alow in Q1 FY2024 was, according to the press release, “an outflow of $151 million, a 6% increase in outflow versus” the year-earlier quarter.
Meme-stock traders might choose to ignore these facts, but investors should always read the fine print and pay attention to Canopy Growth’s worrisome financial details.
Don’t Hold CGC Stock for More Than a Few Days
Again, short-term traders are free to buy and sell Canopy Growth shares for quick profits. They don’t need to worry much about Canopy Growth’s fundamentals.
Sensible investors ought to be concerned about Canopy Growth’s ability to continue as a “going concern.” Finally, it’s fine to trade CGC stock for up to a few days, at most. Beyond that, investing long term in Canopy Growth is too much of a gamble.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.