Investing in stocks is a great way to grow your wealth overtime. Consider, for instance, that over the past five years, the S&P 500 index is up by about 50%. It would be difficult to earn such returns by putting your money in a savings account. Despite the potential for significant capital appreciation, though, the stock market obviously presents some risks. Indeed, not all stocks are created equal, and some stocks are best avoided. Let’s consider two such stocks: eBay (NASDAQ:EBAY) and Canopy Growth (NYSE:CGC).
eBay’s growth is slowing
eBay was one of the pioneers of the growing e-commerce industry, and to this day, the company remains a major player in that industry. However, as competition has gotten stiffer, eBay’s prospects have looked increasingly murky, for two major reasons. First, the company seems to be losing some of its market share. Over the past two years, eBay’s gross merchandise volume (GMV), the total dollar value of transactions conducted on its platform, has decreased. eBay’s GMV was $24.4 million in the fourth quarter of 2017. During its most recent quarter — the third quarter of 2019 — eBay’s GMV was $21.7 million. Why does this matter? eBay described GMV as a “significant factor” that affects its net revenue, and as this figure drops, the company’s top-line growth is likely to be unimpressive.
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During the third quarter, the company’s revenue remained flat compared to the year-ago period, and for the corresponding nine-month period, eBay’s top line grew by a measly 1%. Second, eBay continues to sell off some of its prized assets. Not too long ago, eBay got rid of its ticket reselling business StubHub, which it sold to a competing Swiss company called Viagogo for $4 billion.
Not only did StubHub have the opportunity to grow — perhaps by landing more ticketing deals — but the business also presented significantly higher margins than eBay’s core marketplace segment. During the third quarter, eBay’s marketplace take rate (the percentage of sales the company pockets) was 8.93%, which compares unfavorably to that of StubHub at 23.23%. Of course, let’s not forget that eBay also gave up most of its stake in the high-flying e-commerce giant MercadoLibre.
With no shortage of competing e-commerce companies, such as Shopify and Alibaba, eBay’s recent struggles make the company not worth the risk.
The largest cannabis company by market cap isn’t holding its rank
The cannabis industry is currently one of the fastest-growing ones. Naturally, investors want to cash in on this growth, and many of them turn to the largest marijuana company by market cap, Canopy Growth. However, the Ontario-based pot grower — as well as its peers — are facing a series of problems. First, there are currently not enough retail stores to meet the demand of cannabis products in Canada. As a result, the illegal market is taking up some of the business that should be going to Canopy and its rivals in the legal market.
Second, the market in the U.S. is not particularly welcoming, either. Cannabis is still classified as a Schedule 1 substance at the federal level, which means it is not recognized as having any health benefits. Even cannabidiol (CBD), which is often regarded as being safer than weed since it contains negligible levels of tetrahydrocannabinol (THC), isn’t exactly harmless; at least that’s what the U.S. Food and Drug Administration (FDA) recently said in a press release. Thus, the regulatory landscape of the cannabis market in the U.S will likely continue to be a major obstacle.
Third, Canopy’s financial results haven’t been good. During the company’s most recent reported quarter, the second quarter of its fiscal year 2020, Canopy reported a decline of 15% in its net revenue. That’s after the company had reported a sequential net revenue decline of 11% during its first quarter. Some could point to the fact that cannabis derivative products were recently legalized in Canada, and still more recently, Canopy unveiled its portfolio of derivative products.
This business promises to offer higher margin than the dried cannabis market segment. Further, we are still early in the evolution of the cannabis industry. Thanks to its current position, as well as its partnership with Constellation Brands, Canopy could be one of the winners in the long run. However, considering what has transpired in the pot market over the past few months, I’d recommend staying away from this stock, at least for now.
Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends MercadoLibre and Shopify. The Motley Fool recommends Constellation Brands and eBay and recommends the following options: long January 2021 $18 calls on eBay and short January 2020 $39 calls on eBay. The Motley Fool has a disclosure policy.”>