Canopy Growth (NYSE:CGC) delayed the launch of its cannabis-infused drinks line because of extra work needed to scale up its production. While investors seem ambivalent to the delays, several of my InvestorPlace colleagues believe this is the kiss of death for CGC stock.
Here’s why I believe they’re wrong.
Recently-appointed Canopy Growth CEO David Klein, Constellation Brands’ (NYSE:STZ) former CFO, jumped from the frying pan into the fire when he took the top job at Canada’s largest cannabis company.
You don’t have to be a rocket scientist to know 2019 wasn’t a good year for CGC stock, which lost 27% in the calendar year. Even worse, it’s lost 50% over the past 52 weeks, and that’s after a 12% gain year to date through January 29.
David Klein does not need any more bad news, so the fact he was forced to hold off on getting some of its Cannabis 2.0 products into the marketplace, suggests both companies don’t want any hiccups once its products are in the public realm. Thus, avoiding the problems that have plagued cannabis retail in Canada since legalization in October 2018.
My esteemed colleague, Laura Hoy, who’s got an excellent track record of weeding out the winners from the losers, feels the delay could have a profound effect on CGC stock.
“The first is execution. A big part of Canopy’s advantage over its peers is its link with Constellation Brands. As Constellation is a beverage company, it’s surprising to hear that Canopy wasn’t able to scale its cannabis-infused beverage business successfully,” Hoy wrote on January 27.
Hoy goes on to suggest that Canopy’s fourth-quarter 2019 and first-quarter 2020 will deliver less-than-stellar results, which Klein will use to get rid of the dead weight in the company.
While that’s a fair assumption, I don’t believe that this translates into a fiasco for its cannabis-infused drinks. Klein was CFO of Constellation from the very beginning of its investment in Canopy. He’s been Canopy’s chairman since October. I find it hard to believe that he wasn’t aware of the timeline around the launch.
It’s more than possible that the delay had everything to do with Canadian cannabis retailers being unprepared for cannabis-infused drinks than Canopy not having its production lines ready to bang out the products.
Perhaps that’s why the announcement hasn’t hurt the share price.
The smart investors understand that this entire legalization process has been a colossal failure on the part of Health Canada and the provincial governments that oversee cannabis’ distribution to the consumer public.
The Likelier Scenario
InvestorPlace contributor Jamie Johnson called the delay “embarrassing,” suggesting it would impact the company’s credibility. It overpromised and underdelivered.
Early in my career, I sold beverages for a large Canadian juice company. The one thing I learned early on is you don’t release a new product into the market until it’s available everywhere. That’s because if Joe or Jane Public walks into a cannabis retailer in Toronto and can’t buy a Canopy-branded cannabis-infused drink, there’s a good possibility that he or she will never come back to make that purchase.
First impressions still mean something in our 24/7 online world.
There are a million reasons why David Klein delayed the launch; perhaps we’ll never know the exact cause. However, to naively assume that it had something to do with incompetence, in my opinion, is short-sighted.
Look what happened to Target (NYSE:TGT) when it entered Canada. It was so excited to gain a coast-to-coast footprint that it failed to stock the shelves sufficiently. It never recovered from that rookie mistake of going to fast and failing to prepare for entering a new marketplace adequately.
Canopy Growth and cannabis-infused beverages aren’t any different.
The Bottom Line on CGC Stock
While it’s true that you can never have all the information to make a decision, Canopy Growth is already well established in the Canadian cannabis market. It’s not as if it will suddenly go out of business next month. It’s got plenty of activity on its plate without the added contribution of Cannabis 2.0 products.
In my opinion, it’s better to be ready than first to market. History is littered with companies that have flamed out spectacularly by being the earliest mover.
If the drinks aren’t available by the summer, then I’d start to worry. Until then, I wouldn’t think twice about the subject.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
