CGC: Is the weed Industry’s 10Billion$ stock in Trouble?

The legal cannabis industry entered the world stock exchange after the WEED IPO in 2014. Canopy Growth, formally known as Tweed Marijuana Inc., went public on the Toronto Stock Exchange for CA$4.60 per share. For those who got in early, they have enjoyed returns of over 500%. Many other cannabis companies have gone public, but none have seen success at the level of CGC.    

While the Ontario-based marijuana company has a market cap of over 10 billion, the future is still uncertain for CGC. The cannabis industry saw huge gains during the height of the COVID-19 pandemic after being deemed an essential business. As we approach some form of normalcy, will the cannabis industry top a year like 2020?

As a Canadian company, CGC is banking on the new US administration opening up recreational cannabis federally. However, the Biden administration has shown interest in opening up the floodgates just yet, and will Canadian corporations get a seat at the table?

The Rise and Fall and Rise of Canopy Growth

Cannabis stocks are fueled by policy change and news-worthy investment deals. CGC’s IPO on the TSX began at just under $5 and didn’t really take off until the US and Canada made cannabis reforms. In 2018, Canada legalized recreational marijuana, becoming the largest nation in the world to do so. In the same year, the United States opened up the sale and production of hemp-derived products (CBD). With the approval from both North American superpowers, buyers expressed confidence in CGC and other publicly traded marijuana companies.

CGC got another boost after Constellation Brands, the beverage empire that manufactures Corona and Modelo beers, invested 4 billion dollars into the cannabis company. The momentum created by cannabis reforms and the largest investment in the history of the cannabis industry ended in spring 2019. CGC lost nearly two-thirds of its stock value in under a year.

The stock price nearly dipped into single digits before the world went into quarantine. Cannabis businesses were deemed essential by the Canadian government and sales skyrocketed. Canopy Growth’s stock price gained most of its value back at the turn of the decade. With lockdowns coming to a close, legal cannabis use is at risk of declining in 2021 amongst Canadians. Even more troubling is the uncertainty of federal cannabis reforms in the United States.

How Does Canopy Growth Make Money?

CGC creates the majority of its revenue-producing, distributing, and selling medical and retail marijuana. It has also expanded by expanding into hemp-derived products, vaping devices, a skincare line, and sports nutrition supplements.  

Recreational Marijuana

Canopy Growth’s largest source of revenue is recreational marijuana. The company has a business-to-business and a business-to-consumer model. CGC’s B2B revenue is created by growing and distributing large amounts of marijuana to provincial and territorial agencies. These government bodies then redistribute the product to physical and online retailers. CGC also sells directly to Canadian consumers through its retail brands Tweed and Tokyo Smoke. According to Canopy Growth’s Management’s Discussion and Analysis of Financial Conditions and Results of Operations, as of December 31, 2020, Canopy Growth operated 33 corporate-owned Tweed and Tokyo Smoke retail stores, an increase from 22 in the previous year.

Medical Marijuana

The foundation of Canopy Growth is medical marijuana. Before 2019, Canadians were only allowed access to marijuana products if they had a doctor’s approval. CGC’s success in the mail order and brick-and-mortar retail space is largely due to its experience in being one of the top providers of medical marijuana in Canada.

Spectrum Therapeutics is the medical division of Canopy Growth. In recent years, its reach has expanded to international markets, supplying medical cannabis clinics overseas. The international division of Spectrum Therapeutics is one of the fastest-growing segments of the company.

Beyond Marijuana

After the United States and Europe deregulated hemp-derived products, CGC made multiple moves to position itself in the rapidly growing sector of the cannabis industry. Shopcanopy.com is CGC’s online, direct-to-consumer eCommerce platform for hemp-derived products in America. Unlike the US, Canadians are subject to purchasing CBD products from a licensed cannabis dispensary. All cannabis products are treated equally in Canada. In the US, there aren’t many regulations on CBD and other non-THC cannabinoids. CGC has teamed up with American home goods legend Martha Stewart by offering her product line on ShopCanpoy.

CGC added to their portfolio by purchasing a British skincare company, This Works for CA$73.8 billion. The cannabis company has expanded on the natural beauty brand by launching new products infused with CBD.

Other areas outside of growing and selling marijuana include vaporizer device brand Storz & Bickel and sports supplement manufacturer BioSteel. Both companies cover areas of the legal cannabis market available to countries outside of Canada.

CGC Financials

Despite being the most valuable cannabis company on earth, Canopy Growth has yet to become profitable. CGC increased net revenue by 76% over FY 2019, but they still lost 1.3 billion in 2020.

Canopy Growth expects to become profitable in 2024, but its plan to do so depends on international markets. They need the US to open up recreational and medical sales nationwide. Their investments in infrastructure and structure suggest they have been planning to expand into the USA for years. Relying on another country to make a policy shift is risky, to say the least, but if the US does federally legalize cannabis and allow international commerce, Canopy Growth is in the best position to capitalize on the opportunity.   

Why is the Marijuana Industry so Volatile?

There’s no debate that the legal cannabis industry is going to expand in the next decade. We will see more deregulation in the US and other countries, most likely in 2021. New York state has already passed legislation to position NYC as the largest legal marijuana market in the world.

When Canopy Growth entered the NYSE in 2018, the IPO stock price was around USD 30. As of today, April 16, 2021, the stock is at USD 27.41. With the clear potential of legal cannabis, why hasn’t the stock failed to take off?

Massive corporations like Canopy Growth and Aurora Cannabis have prepared their organizations for a global industry. Their investments are setting up infrastructure to ship cannabis outside of Canada.

Cannabis stocks are so volatile because the companies are currently limited. There isn’t enough opportunity in Canada by sheer population numbers. Also, Canadian laws prevent major companies from dominating a market. 

An Inevitable International Market?

Canopy Growth is dependent on expanding internationally. They are already accomplishing this by getting into CBD in the US, skincare products in Europe, and by selling medical marijuana internationally. For CGC to be successful, they have to expand their recreational cannabis reach. The United States is the perfect opportunity but there is a chance this could never happen.

The company is now led by former CFO of Constellation brands, David Klein. Furthering their ability to function as a true multi-international corporation. Until the US gives Canada the green light to import cannabis, growth will continue to be limited.

In the US, state borders are also preventing cannabis companies to scale. They are limited to a certain population as they aren’t legally permitted to export their product. If the US were to legalize cannabis, US companies aren’t in the position to fill the demand for the entire country, giving a corporation like CGC to capitalize on fresh recreational and medical marijuana markets.

The Future of the Cannabis Industry and CGC

Canopy Growth’s future is hanging on US legalization. They could become profitable one day without the United States’ help, but to deliver on expectations requires a new much larger market to open up.

Many believe the Biden Administration will legalize recreational marijuana federally. However, it is not a priority of the new presidency so far. For those patiently waiting for the president to deliver news on cannabis legalization, they have surely been disheartened by recent reports of the administration firing staffers who admitted to using cannabis.

Even if Joe Biden does federally legalize marijuana in the US, this doesn’t guarantee Canopy Growth’s a seat at the table. State-to-state commerce could even be prohibited, with the first measures to deregulate marijuana.  

Buy, Sell, or Hold Canopy Growth

Canopy Growth’s 2020 numbers are promising; however, the COVID-19 lockdowns were godsent for the Canadian marijuana company. 2019 was a horrible year for all publicly traded cannabis companies. Despite an increase in revenue over 2019, CGC closed multiple facilities across Canada and fired over 200 full-time employees.

Canada will be slow to open up its economy, keeping cannabis consumption up for a little longer, but 2020 is an overall outliner. Until we hear better news coming out of CGC, we are selling. Too many regulations and not enough people in Canada to support multiple cannabis corporations. CGC may not be in the buy range today, but they are still in the best position to supply the USA with recreational cannabis and a policy change away from solidifying their place as the most dominant cannabis company in existence.

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