Along with many other cannabis operators like Tilray (NASDAQ:TLRY), Cronos (NASDAQ:CRON) and Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC) has certainly been in a grueling downward spiral. Since late January, the shares have gone from $50 to $25 — putting the market cap at $8.8 billion.
This is partially because the aftermath of marijuana legalization in Canada has not been as robust as expected. There have been issues with supply chains as well as black market activities.
Yet CGC stock has had its own internal issues, especially with its senior management. Back in July, CEO Bruce Linton was essentially terminated. For the most part, the company’s largest shareholder, Constellation Brands (NYSE:STZ), was far from impressed with his efforts. There is now an interim CEO, Mark Zekulin, who will stay on board until a replacement is found.
But despite all this, I still think there is much potential for CGC stock — so long as investors are willing to stomach volatility. Let’s take a look.
Canopy Growth’s Scale
In the coming years, scale will be critical for the cannabis operators. Scale will allow for expanding margins but also help with being price competitive.
The good news for CGC is that the company has been hyper aggressive in ramping up its production, both through acquisitions and organic growth. For example, in the latest quarter, production soared by more than 300% to 41,000 kilograms. Keep in mind that the company is the largest player in the Canadian market, with about 30% of market share.
On the demand side, the situation looks positive as well. The average selling price for cannabis has been relatively stable in Canada. And, there continues to be strong growth in adult-use purchases.
A Strategic Partner
The massive $4 billion investment from STZ is really a game changer, as it has provided key competitive advantages. To this end, the company has the resources to snag choice assets on the markets.
This was definitely the case with the unique acquisition of Acreage Holdings, which is the largest integrated owner of licenses in the U.S. (with grants in 20 states). The deal is actually contingent on legalization in the U.S. market. In other words, when that happens, CGC will be poised to benefit quickly.
Another interesting deal was for KeyLeaf Life Sciences, which is a bio-product extractor. With this, CGC is better positioned to benefit from the enormous CBD opportunity in the U.S.
But of course, STZ will be instrumental in providing global distribution, leverage its with existing brands (such as Corona Extra, Corona Light, Modelo Especial, Modelo Negra and Pacifico) and assistance with core functions like marketing and advertising.
Cannabis 2.0 and CGC Stock
Cannabis 2.0 will happen on Oct. 17. This is when it will be legal to sell cannabis extracts in Canada, such as edibles, drinks and vaping products. However, cannabis operators will need to undergo a 60-day permit process in order to sell these derivative products.
For CGC, Cannabis 2.0 is likely to help boost the growth rate. This could quickly become a $1 billion-plus opportunity. It may be even bigger than last year’s legalization.
Regardless, CGC is in a great position to benefit. With the help from STZ, the company will have a set of compelling proprietary products and strong marketing capabilities. And yes, its strong production capacity will help it to dominate the market.
So all in all, Cannabis 2.0 could be a nice catalyst for next year.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.