Why Canopy Growth Stock Crashed 10% on Thursday

Canopy Growth can’t make money selling cannabis — so it’s selling shares instead.

Canadian cannabis company Canopy Growth (CGC -8.71%) tumbled 9.8% through 11:55 a.m. ET Thursday after announcing plans to create and sell $250 million new Canopy shares at whatever the market price is when the sales occur.

Precisely when such sales will occur “will be determined in the Company’s sole discretion.” But management might want to wait a bit before selling — because if it sells right now, it’ll be getting 8% less money than if it had been able to sell those shares yesterday.

Why is Canopy Growth selling shares?

As Canopy Growth explained, it needs the extra cash to fund “potential future acquisitions,” to pay down debt, and also “for working capital and general corporate purposes.”

Of course, the reason why Canopy needs to sell shares to raise this cash is… because Canopy can’t generate cash on its own. According to data from S&P Global Market Intelligence, Canopy burned $210 million in cash last year, and indeed, has never generated positive free cash flow since it began business. This is despite the fact that marijuana has been legal to sell in Canopy’s home country of Canada since 2018.

Why are investors upset with Canopy Growth?

Today’s decision to sell shares highlights the fact that Canopy has — so far — been unable to fund even its own operations by selling marijuana, and so must sell shares instead. And after today’s sell-off, it means shareholders can anticipate Canopy having to sell as many as 32 million shares in order to raise the $250 million it needs.

This is a big deal.

Adding 32 million shares to Canopy Growth’s current 75.1 million shares outstanding means investors can expect to be diluted by about 14% — i.e., each share they own will represent 14% less of an ownership interest in the company. On the plus side, of course, Canopy will get enough cash to fund its operations for another year.

On the minus side, unless something changes, investors can expect to get diluted again in a little over one year.

Rich Smith 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.

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