Why Canopy Growth Stock’s Success Signals Big Things for Marijuana Industry

Why Canopy Growth Stock's Success Signals Big Things for Marijuana IndustryCGC Stock Breakout Shows Promise for Other Pot Stocks

One of the things we’re eagerly watching in 2020 is how the marijuana industry will mature. With some pot companies putting emphasis on profits now and others geared toward continued spending and growth, there’s a way for smart investors to see portfolio growth both in the short and long terms.

Canopy Growth Corp (NYSE:CGC) has certainly been proving that marijuana stocks could be some of the fastest gainers in 2020. Canopy Growth stock shot up by about 15% on February 14 after the company posted better-than-expected results in its latest quarterly report.

Net revenues increased by 62% from Q2 2020 to Q3 (or by 13%, excluding the impact of portfolio restructuring charges). (Source: “Canopy Growth Reports Third Quarter Fiscal 2020 Financial Results,” Canopy Growth Corp, February 14, 2020.)

Another good sign for the marijuana industry at large is that Canopy Growth’s total operating expenses decreased 14% versus Q2 2020. That shows it’s possible for other cannabis companies to reduce their costs too.

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Also in the quarter, the company lowered its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss from $156.0 million to $92.0 million. That improvement was a result of higher sales, improved gross margins, and lower operating expenses.

“In Q3 we executed across Canada, in our international markets and in our strategic acquisitions to drive revenue growth,“ said CEO David Klein. (Source: Ibid.)

In a post-earnings call with analysts, Klein added, “A key priority for us has been to reduce cash burn. And that will continue to be a priority for the business going forward.” (Source: “Canopy Growth shares surge after reporting smaller-than-expected loss,” Financial Post, February 14, 2020.)

Canaccord Genuity Corp. analyst Matt Bottomley was pleased with the results.

“We were particularly encouraged to see Canopy print a solid sequential increase in its recreational sales in a period where many of its peers are anticipated to see flat to lower revenues to end 2019,” said Bottomley. (Source: Ibid.)

So while this is all fine and dandy for CGC stock in particular, what this actually shows us is the greater potential within the marijuana market as a whole.

Marijuana Stocks on the Rise

I’ve long said that Canopy Growth stock, being the industry standard bearer, is a pretty good gauge of how the overall cannabis stock market is faring. When CGC stock is up, that typically means the broader pot stock market will soon follow.

That has almost always held true, and there’s no reason to suspect that this time will be any different.

What is different this time, though, is what Canopy Growth and many of its compatriots have been doing: cutting costs.

In the wake of last year’s slower-than-anticipated start to the recreational marijuana market in Canada, in 2020, many cannabis companies have shifted their focus toward maximizing profits, even if that comes at the expense of growth.

You can go back and find tens of thousands of words I’ve written on that topic specifically, but in summary, there’s a price to pay if you want to go that route. Namely, if you focus on immediate profits, you’ll be missing out on the future potential of the marijuana market.

No one in their right mind believes that the cannabis market’s potential is anywhere close to having had been met. There are so many things in development that are going to result in huge gains for pot stocks down the road.

Dozens, if not hundreds, of legal marijuana stores are set to open across Canada in 2020. That’s a huge change from 2019, when several provinces (most notably Ontario) left consumers woefully under-served due to bureaucratic red tape that has slowed the rollout in some areas.

Another big development is the progress of marijuana legalization in the U.S. and around the globe. In many regions, we’re seeing marijuana legalization become the norm rather than the exception.

While we still don’t have many markets that are open to legal recreational pot, the momentum is, without a doubt, building behind the pro-pot movement.

The U.S., for instance, long considered more on the puritanical side with its long-waged War on Drugs, has several Democratic Party presidential hopefuls (including front runner Bernie Sanders) with pro-legalization agendas. If one of these individuals finds themselves in the Oval Office in 2021, the marijuana market is bound to expand by several magnitudes.

A big part of the reason that legal marijuana sales have been somewhat slow in Canada in the aftermath of legalization (and in U.S. states where pot is legal) is that the black market is still going strong.

One of the biggest reasons for this is that the black market has, for decades, been the only way to purchase pot. Many habitual users are therefore used to extra-legal means to get their marijuana.

While legal weed would seemingly offer an enticing option to people who do not want to break the law, it’s frankly not enough of an incentive to counterbalance legal weed’s higher prices. After all, there’s quite a bit of red tape that goes into government certification and licensing of legal weed companies, not to mention the taxes.

That problem is eventually going to be fixed, as companies find ways to innovate in their production methods and keep costs down, eventually being able to squeeze out the black market.

This will take time, but what the numbers in Canopy Growth’s most recent quarterly report show us is that marijuana companies are continuing to figure out better ways to produce their products. That will go a long way toward beating the black market and increasing legal profits.

Analyst Take

The marijuana industry is continuing to mature according to our projections. This means investors can expect big profits to come from the sector. Canopy Growth Corp’s latest quarterly report signals that many of our predictions about the cannabis sector are coming to fruition.

We knew that the increased focus on juicing profits and cutting costs would eventually pay off in a weed stock surge, and that’s exactly what has taken place. While I’ve called into question the long-term viability of this strategy (and I’m still bullish on marijuana companies that aim to expand rather than see profits today), this is still a great way to see quick investment gains.

On top of all that, Canopy Growth stock, by virtue of being the largest pot stock by market cap, often serves as the trendsetter. In that case, the trend is very positive for marijuana stocks in general.

Canopy Growth’s numbers show that the company is finding ways to innovate on production and keep costs down, a key component in the fight against the black market. While those numbers bode well for CGC stock in particular, they also promise big things to come for other pot stocks.