Canopy Growth (NYSE:CGC) Chief Executive Officer David Klein probably won’t be feeling the love when Canada’s largest cannabis company by revenue reports its first earnings under his watch on Valentine’s Day.
Klein joined Ontario-based CGC in December from the company’s largest shareholder, Constellation Brands (NYSE:STZ), where he was chief financial officer and executive vice president. Voted a “top CFO” the past three years by Institutional Investor magazine, Klein has promised to bring financial discipline to the company — which was lacking under his predecessor Bruce Linton, who was ousted last year.
However, that’s easier said than done.
As I noted in December, CGC may have to write down the nearly 2 billion CAD in goodwill generated from the 26 acquisition the company made on Linton’s watch. Linton, the company’s founder, also performed seven financing deals in less than five years. So, collectively, the money-losing company is years away from turning a profit.
To make matters worse, CGC is spending money at breakneck pace. During its most recent quarter, Research and Development spending surged 526% on a year-over-year basis while General and Administration rose 137%. And, the CGC stock price isn’t helping matters either.
CGC Stock Has Been Through the Wringer
Shares of Canopy stock have slumped more than 53% over the past year. Wall Street analysts have a median 52-week price target on CGC stock of $20.72, roughly 7% below where it currently trades. On the upside, however, CGC stock has rebounded about 13% over the past month.
Additionally, Constellation Brands made a big splash when it upped its stake in Canopy to 38% for $4 billion in 2018. At the time, Constellation CEO Ron Sands gushed about the “tremendous growth opportunity” legal cannabis presented to his company. Shares of CGC stock spiked more than 30% in the wake of the deal’s announcement. However, Constellation — whose brands include Corona and Modelo beer and Svedka vodka — recently announced a $534 million write-down of its Canopy Growth investment.
The alcoholic beverage firm invested in CGC in the hopes of cashing in on the expected huge demand for beverages infused with an extract of cannabis called cannabidiol, or CBD.
Crackdown on CBD Adds to the Uncertainty
In a report to clients last year, Cowen & Co. spoke of the $16 billion U.S. opportunity from CBD beverage sales. Such a wildly optimistic view assumes that CBD can cure many medical issues, despite the lack of scientific evidence. The FDA has already warned companies about making medical claims that can’t be backed by scientific evidence. And that will make marketing CBD beverages harder than it would have been otherwise.
It’s only a matter of time before regulators from all over the world throw the book at CBD companies as they did with the vaping industry. Meanwhile, as Barron’s noted, there is a glut of CBD, as prices plunged 25% from December to January.
Overall, shares of CGC stock have struggled over the past year — but seem to be trending upward as of late. More than 20% of the float for Canopy Growth stock is controlled by short-sellers.
That said, the potential risks from CGC stock are more significant than the possible rewards — and therefore, new CEO David Klein has some work to do.
Jonathan Berr doesn’t own any of the aforementioned stocks.
