What happened
Top Canadian marijuana company Canopy Growth (CGC 20.65%) wasn't tops with investors on Tuesday. Its shares took a nearly 5% hit after a credit rating agency downgraded it.
So what
Fitch, one of the Big Three U.S. credit rating agencies, reduced its assessment of Canopy Growth's debt from a B- rating to a CCC. That, by the way, happens to be the fifth-lowest rating that Fitch assigns to debt.
The credit rating agency explained that the move "reflects Canopy's significant market share losses in the Canadian market, given execution missteps and operating challenges with pivoting its cultivation strategy, which has resulted in weak operating results with an uncertain path to profitability and reduced liquidity."
Like many marijuana companies, Canopy Growth is struggling with a host of challenges, both internal and external. Black-market competition limits the prices it can charge for its products, its domestic market is fairly saturated, and taxes on cannabis are high.
Meanwhile, unlike in the U.S. where marijuana use has only been sanctioned on a piecemeal, state-by-state basis (and thus, where the legal market has more room for growth), marijuana legalization has been fully enacted at the federal level in Canada.
Canopy Growth's challenges are exacerbated by its poor cash flow, high indebtedness, and the presence of determined competitors.
Now what
Even casual observers of Canopy Growth's business are well aware of the problems cited by Fitch. Nevertheless, the agency's downgrade was a stinging and painful reminder of the many obstacles the company must overcome if it is to achieve profitability. As ever, Canopy Growth is sorely in need of encouraging news, and it doesn't feel like it's likely to get any of that anytime soon.
