One of the first out of the gate as well as one of the more ambitious about its international intentions, Canadian cannabis licensed producer Canopy Growth (Canopy Growth Stock Quote, Charts, News, Analysts, Financials TSX:WEED) has so far remained a work in progress, with many pieces at play including a US-based backer in Constellation Brands that wants to see a big results from its $5 billion investment.
How will it turn out for Canopy? Likely not well when it comes to the lucrative and growing US pot market, says Brian Madden of Goodreid Investment Counsel, who thinks while cannabis has come of age as an investment vehicle, you’d be better off looking past Canopy Growth.
“We don’t own this and we wouldn’t buy it,” said Madden, speaking on BNN Bloomberg on Tuesday. “We were very vocal critics of the first generation or first iteration of cannabis companies that were listed here, going back about five or six years.”
“We changed our tune and actually bought a US multi-state operator [in Curaleaf Holdings]. Canopy Growth doesn’t check the same boxes as Curaleaf does,” Madden said.
It’s been a dismal eight months for Canopy shareholders, who have seen their stock go from $60-plus per share in mid-February to now $16 and change. The company certainly has had its trials and tribulations but the drop in the stock is also reflective of a severe sector-wide pullback across cannabis.
Part of the problem is dwindling faith in the fortunes for legalizing marijuana at the federal level in the United States, where a new Democratic administration had initially led to high hopes for an opened up industry.
But for Canopy in particular, the company has had to scale back operations this year, dropping almost a third of its workforce while continued losses on a quarterly basis have been glaring. Most recently, in August Canopy reported first quarter fiscal 2022 financials that showed revenue up a respectable 23 per cent year-over-year to $136.2 million but coming with a net loss of $390.0 million. On an adjusted EBITDA basis, the company lost $63.6 million.
At the same time, management has been upbeat in its projection of profitability by the end of this fiscal year, ended March of next year.
“We’re continuing to drive cost savings and operational efficiencies across the company, and remain broadly on track to our target of $150-$200 million in fiscal 2022-fiscal 2023,” said Mike Lee, Canopy’s CFO, in the fourth quarter press release on August 6. “We look forward to scaling our new operating model in coming months as we push forward our profitability goals in fiscal year 2022.”
Like a number of the Canadian players, Canopy Growth is eyeing entry into the US market, something that will require movement on the federal level on cannabis, which remains a Schedule One drug, a predicament which is effectively keeping Canadian public pot companies from operating in the US. At present, Canopy has a stake in US multi-state operator TerrAscend along with a deal to acquire US company Acreage Holdings if and when legislative change is enacted.
But in the meantime, Madden says investors should stay away from Canopy, despite the company’s leading role in these still early days of Canadian cannabis.
“[Canopy] is financially strong and cashed up from the transactions with Constellation Brands and Constellation owns a significant equity stake so it’s not going away,” Madden said. “Some of the governance issues that other producers had we don’t think Canopy has because of the backing of the reputable beverage alcohol producer that owns a big block of it.”
“Having said that, Constellation Brands is probably the only logical buyer of this asset with blocking rights via their equity stake. So, although it’s a good asset we’re unlikely to see a bidding war for [Canopy] when the US cannabis market opens up federally,” Madden said.
“Meanwhile, Canopy is not really operating in the US. They’re in Canada, a market one-tenth the size and sort of not building out that kind of foothold that other operators are in the US, which is ultimately where the real money is going to be made,” he said. “And in the meantime, they’re not making any money. So, Canopy is not going away, but we don’t see the same upside with this company as we do with those that are already operating and have a significant presence in the United States today.”
Canopy Growth made a deal earlier this year to strengthen its presence in the Canadian craft cannabis market by acquiring Supreme Cannabis for $435 million. Canopy said the move would create an estimated $30 million in synergies over the next two years.
“Through the addition of Supreme, we’re strengthening our leadership position by offering Canadian consumers a differentiated brand portfolio – including the addition of 7ACRES, which further bolsters our premium product segment,” said David Klein, CEO of Canopy, in a June 23 press release. “Supreme has demonstrated the ability to cultivate premium quality flower at low cost and we’re excited to leverage these capabilities to further our leadership in the Canadian market as we scale these newly added brands and accelerate revenue growth.”