Canopy Growth is Pushing CGC Stock to an Inflection Point

It’s an admittedly tired trope regarding Canopy Growth (NYSE:CGC). Many owners of CGC stock have largely learned to ignore the rhetoric, recognizing it takes money now to make money later. The company’s heavy spending is setting the stage for a bright future rather than an impressive present.

Canopy Growth is Pushing CGC Stock to an Inflection Point

Source: Shutterstock

What most Canopy Growth stock owners may not fully appreciate is the extent to which the company is — figuratively and somewhat literally — betting the farm on a future that may or may not materialize.

Wednesday’s post-close earnings report may help the market better understand this reality, at a point when more than a handful of investors were already starting to entertain doubts.

Seemingly Healthy, But Check Under the Hood

It has been true of every pot stock from Aphria (NYSE:APHA) to Tilray (NASDAQ:TLRY). Even before Canada legalized recreational marijuana in October of last year, its primary players were jockeying for position.

Translation: Those cannabis companies were spending money however they could get it in order to acquire or at least tie-up partners before a rival company did.

Canopy Growth was able to take a different, healthier route to that destination. Constellation Brands (NYSE:STZ), which makes a variety of spirits and beers including Black Velvet Whisky and Corona (respectively), made a modest investment in the company in 2017, but upped its stake in 2018 with a hefty $4 billion investment in CGC stock.

The move gave roughly 40% of the cannabis company to Constellation, and gave Canopy Growth a much-needed cash infusion.

A big chunk of that funding was still on the books as of the quarter ending in March too. Canopy Growth’s balance sheet consisted of $2.5 billion in cash, and a little more than $2 billion worth of marketable securities. Canopy Growth, it seems, is liquid even if $3.4 billion has been earmarked for the purchase of Acreage Holdings if and when the United States legalizes cannabis at the federal level.

Don’t think for a minute the company’s books are as clean as they may seem with just a cursory glance, though. The potential liabilities are stacking up, even if not in the usual places.

Canopy Growth Stock as Cheap Currency

Bloomberg Intelligence analyst Kenneth Shea rang the alarm bells last month, cautioning investors that heavy writedowns were likely to be seen for pot companies during the earnings season currently underway.

The accounting adjustments are a means of re-valuing an acquired company once it has been integrated into an existing operation, to better reflect that deal’s true value to the buyer.

Company purchases are initially added to the ‘goodwill’ line of the balance sheet … a somewhat arbitrary figure that exists only because a deal has to be debited somewhere, and credited somewhere else. Over time, if an acquisition doesn’t add tangible value quickly enough (or at all) the amount of goodwill on the books is reduced. It’s not a cash expense, but damaging all the same.

Shea specifically names Aphria, Aurora Cannabis (NYSE:ACB) and — you guessed it — Canopy Growth as names particularly vulnerable to writedowns.

It’s not an unreasonable concern. As of the end of the fourth fiscal quarter in March, Canopy Growth was carrying $1.5 billion worth of goodwill on its balance sheet.

Other concerns sitting on the balance sheet include $842 million worth of long-term debt that cost the company nearly $12 million in interest payments during the three-month stretch.

For perspective, Canopy Growth did $226.3 million in revenue for the quarter ending in March.

Perhaps the most alarming, even if not the biggest, expense of all is how much the company’s stock-based compensation has been costing it. In its fourth and final quarter of the year alone, stock-based compensation cost Canopy Growth $93.2 million, $74.7 million of which was effectively part of employee paychecks; the other $18.5 million was linked to milestones achieved by acquired companies. And that wasn’t unusual. For the quarter ending in December, compensation in the form of CGC stock reached $63.9 million.

In both quarters, share-based pay was the company’s single-biggest operating expense, outpacing sales and marketing or R&D spending.

Looking Ahead for CGC Stock

To be fair, other cannabis stocks have employed similar practices, and find themselves in comparable situations as a result. Few investors can convincingly argue that marijuana mania hasn’t largely forced the industry’s most recognizable names to enter an acquisition race they didn’t entirely want to run. Investors so far have been mostly willing to overlook the spending spree.

That’s changing though.

Perhaps with a nudge from CannTrust Holdings (NYSE:CTST) and TILT Holdings (OTC:SVVTF), investors are no longer giving out free passes and ignoring numbers they don’t like. The latter already booked the kind of big writedown Bloomberg’s Shea warned about, while the former has run into serious accounting concerns and has just been busted for unauthorized storage.

That’s not to suggest Canopy Growth has to face an uphill battle when it reports quarterly numbers after Wednesday’s close. But, by most measures, that is what it will be doing.

Bottom line? The backdrop is quickly changing as patience wears thin. Investors may start to pick apart the pieces of Canopy’s books that have thus far been overlooked. If the company can’t justify all of the expenses and balance sheet concerns in a highly convincing way on Wednesday, an already-struggling CGC stock could start another round of bearishness.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site,, or follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC