Marijuana stocks are on fire to start 2020. After a most dreadful year in 2019, the sector has started the new decade with a bang. And Canopy Growth (NYSE:CGC) is no exception. CGC stock is up 25% in just a few weeks.
The clear spark that set the latest excitement off was OrganiGram’s (NASDAQ:OGI) shocking earnings beat. It so surprised the market that OrganiGram stock shot up 50% in two days.
Short sellers saw the writing on the wall and started bailing on their positions across the marijuana industry in fear of a chain reaction. However, OrganiGram is a small company with a conservative approach to business; its ability to turn toward profitability doesn’t necessarily ensure that larger players like Aurora (NYSE:ACB) and Canopy will be able to mount similar turnarounds.
Furthermore, Canopy continues to underwhelm. While the operating results have been bad enough, sentiment has been even worse. The revolving door in the management suite and various rounds of underwhelming guidance continue to irritate Canopy’s shareholders. And now they’ve just said that a key upcoming product launch won’t be ready on time.
Beverages Delayed
Canopy Growth announced that it is delaying the launch of its cannabis beverages. In November 2019, Health Canada granted Canopy its license to begin production of beverages at its new facility. As a result, in theory, Canopy was supposed to be able to launch drinks shortly.
However, the company said that it needs to delay the launch to make sure products are up to their standards. The company suggested that the seven weeks it has had with a commercial license hasn’t been enough to scale up to mass production yet. That’s in contrast to just last month when Canopy stated that beverages should go live in January.
The company’s explanation for the delay came off as vague. Jeffries’ analyst, Owen Bennett, slammed Canopy for pushing back the launch, writing that:
“Today’s update will do little to satisfy investors who have already seen Canopy downgrade sales guidance twice this fiscal year […] We also note there appears no excuse for this announcement, with the delay caused by lack of clarity internally rather than unforeseen external factors, which is even more worrying.”
Ontario’s online store introduced more than a dozen edibles and beverages this week, and nearly all sold out immediately. This should have been a big market opportunity for Canopy to grab both easy revenues and first mover advantage in establishing their brand.
Not So Bad?
Canopy’s press release tried to reassure investors that this wouldn’t be a huge problem. The company claimed that this product delay will not have a “material impact” on the company’s fiscal year 2020 revenues.
At first blush, that may sound reassuring. But think about it for a second. So much of the bull thesis for various cannabis companies has been Cannabis 2.0 – expanding the market into a much broader range of consumer products.
When Canopy misses the launch window for these products, it should have hit their revenue expectations, right? It seems strange that beverages were a major part of the bull thesis, yet delaying them supposedly won’t impact the company’s annual outlook.
The Constellation Factor
I’ve long been skeptical of Canopy’s key investor, Constellation (NYSE:STZ). Constellation has a long and decidedly mixed track record in M&A, and is known for wildly overpaying for deals. Those include its 2000s spree of baffling wine acquisitions including Mondavi and Vincor that led to substantial losses later on.
They added to that track record with their disastrous purchase of craft brewer Ballast Point for $1 billion in 2015; they resold Ballast Point late last year for less than $100 million for a stunning 90% loss in just five years. That’s shareholder value destruction at a high level.
Then, of course, there’s the little matter of Canopy. Constellation invested around $4 billion into Canopy and has already taken a nearly billion-dollar write-off on that stake. It forced out previous management at Canopy and installed its own choices to run the company in an effort to turn things around.
Despite Constellation’s involvement, things don’t appear to be improving, however. Take this drinks launch. If there’s one thing a Constellation-led company should be capable of doing, it would be getting a new line of refreshments out on time. Constellation is, at its core, a beer company, after all. But no, they just missed a key launch window for cannabis drinks.
How can you get excited about Canopy’s turnaround story when the new management team is already missing what should be achievable targets?
The Bottom Line on CGC Stock
I know Canopy stock is running up lately in line with a suddenly rejuvenated sector. But not all marijuana stocks are created equal. Constellation and Canopy have proven to be a nightmarish combination so far.
And botching a key Cannabis 2.0 rollout seemingly indicates that little has changed for the entity.
There are better ways to play the marijuana industry. Perhaps CGC stock will continue to rally as the short squeeze rolls on. Longer-term, however, this isn’t the best pick in the sector.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
