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There’s a Good Reason Partnering with Drake Didn’t Move CGC Stock

Investors still are skittish about CGC stock

Canopy Growth (NYSE:CGC) recently announced a partnership with well known Canadian rapper Drake, but it’s unlikely to do much for CGC stock.

There's a Good Reason Partnering with Drake Didn't Move CGC Stock
Source: Shutterstock

The two will be launching a joint venture called More Life Growth Company, and the licensed cannabis producer will be based in Drake’s home town of Toronto. While CGC stock popped initially on the news, it ended up closing at $19.08 for a 1.75% loss on the day.

It appears that even the star power of Canada’s best-known rapper and Toronto Raptors superfan is unable to lift Canopy Growth stock out of its nine-month slump.

CGC Stock and Drake

There are three things the average person probably knows about Drake. First, the Canadian rapper is an international music superstar and actor. Second, Drake is a highly visible Toronto Raptors superfan. And third, these days he’s apparently dating Kylie Jenner.

However, Drake is also an accomplished entrepreneur who has been involved in launching his own record label, whiskey and restaurant. His latest venture was announced on Thursday. Drake and Canopy Growth — two “Canadian icons” as described in the press release — are partnering on a Toronto-based cannabis producer called the More Life Growth Company. Drake will own 60% of the company with CGC taking a 40% share.

Already licensed to produce cannabis, the facility will see production and maintenance run by Canopy Growth, which will also retain rights for product distribution. Drake will be a big part of promotion and marketing. Canopy’s CEO had this to say about the venture:

“When we first began talks with Drake we were extremely inspired by and aligned with his vision to bring best-in-class cannabis products to the world. Drake’s perspective as a culture leader and entrepreneur combined with Canopy Growth’s breadth of cannabis knowledge will allow our new company to bring an unmatched cannabis experience to global markets.”

Global cannabis markets may have a different reaction, but the stock market wasn’t impressed by the news, handing CGC stock a 1.75% loss.

Will Edibles Finally Boost CGC Stock?

Switching gears from Drake, CGC stock investors have been looking to edibles to be the next wave of growth for the company. Canada legalized cannabis edibles in October (although the first product isn’t expected to be on retailer shelves until December), and this market could tap another $2 billion in sales in the Canadian market.

Cannabis edibles appeal to those who don’t want to smoke marijuana, and they also offer the opportunity for producers to offer higher-margin products — like gourmet cannabis-infused chocolates. CGC has gone so far as to buy a former Hershey (NYSE:HSY) factory in Ontario to do just that.

There is a potential snag here though, as pointed out in the Globe and Mail out by Michael Armstrong, associate professor at Brock University’s Goodman School of Business. He notes that cannabis producers such as CannTrust (NYSE:CTST) have had trouble complying with basic production regulations — rules that are very clear cut. Cannabis edibles are another matter:

“Cannabis is a complex substance that neither scientists nor marketers fully understand. That makes successful product design very challenging. How should cannabis drinks taste or lotions smell? What’s the best mix of the cannabinoids tetrahydrocannabinol (THC) and cannabidiol (CBD) for each market segment? … if firms such as CannTrust, Agrima and Bonify apparently can’t handle simple process conformance, how can investors believe they’ll succeed at complex designs of consumer products?”

CGC hasn’t run afoul of Canadian regulations the way CannTrust has, but the company has had its own problems — including the ouster of its founder and Co-CEO this summer.

Will it get cannabis edibles right? Or will the launch of edibles be another extended ramp up, with Canadian consumers failing to take the expected leap and investors growing increasingly impatient?

We should start to get a sense of how edibles play out in the Canadian market in the next month or two. In the meantime, Canopy Growth is expected to report Q2 earnings next week. And even though CGC stock didn’t get any traction on the initial news, there’s always the possibility that promotion by Drake might eventually pay off.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/partnering-drake-move-cgc-stock/.

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