Canopy Growth Corp: What Does the Future Hold for CGC Stock and the Marijuana Market as a Whole?
Canopy Growth Stock Future
There was probably no bigger personality in the marijuana business (as far as executives go, that is) than Bruce Linton. The former Canopy Growth Corp (NYSE:CGC) CEO and founder is famous for taking a defunct chocolate factory in a small town in Canada and transforming it into the largest marijuana empire in the world, at least according to valuation.
But that reading has suddenly taken a turn with his firing by his own board. What does his departure mean for Canopy Growth stock? And for the marijuana industry more broadly?
In order to properly dissect this, we need to understand how one of the biggest names in pot was so quickly dethroned.
There are a number of reasons that Linton is no longer serving as executive of Canopy Growth, but it really all started when he made his biggest deal as head of Canopy Growth: the investment from Constellation Brands Inc (NYSE:STZ).
The alcohol producer poured in over $1.0 billion into Canopy Growth Corp—twice—sending not only CGC stock soaring, but the entire industry on massive bullish runs both times. It was hailed at the time as one of the best deals ever struck in the marijuana business, and the surging stock prices reflected that.
The thinking went that if “Big Alcohol” was getting in on marijuana, that meant this was a legitimate business with a very bright future. Not to mention they’d be able to share resources and work together to create a very exciting product: cannabis-infused beverages.
And it makes sense for Big Alcohol to make this move. After all, alcohol sales have been stagnant or declining for years; marijuana drinks could reinvigorate the alcohol business.
Furthermore, marijuana, once legal in more jurisdictions, will likely serve as a direct competitor to alcohol (there’s only so many recreational drugs people can indulge in, after all), and that fear could lead to a “can’t beat ’em, join ’em” mentality.
So on the surface, this would be a match made in heaven. But Linton’s departure has exposed a deep-seated problem between these seemingly perfect marriages: the present versus the future.
What I mean by this is that Big Alcohol companies like Constellation Brands are well established and are interested in mainly one thing: sales.
Marijuana companies and the people who helm them, though, often view marijuana companies through a different lens: as young players in a nascent industry that is ripe to be exploited, but will require a lot of money up front to see that end. A growth phase company, in other words.
And many marijuana markers will use the tech analogy to point out that losing money even for years on end can pay off with big profitability.
It’s a philosophy that is well at home in Silicon Valley, but among the execs at Constellation Brands Inc, it was wrong. In their view, now is the time for profits, not reinvestment. That was fundamentally different than Linton’s vision, so the company used its 38% stake in Canopy Growth Corp to oust the founder.
“Many companies that trade on exchanges are measured on earnings per share every 90 days,” Linton explained. “That’s a good model, but there are other companies that are in a growth and creation phase — Amazon might have done a bit of that, Netflix … where what they’re doing is looking at … how do they build this thing out and emerge as a massive dominant player.” (Source: “Former Canopy Growth CEO Bruce Linton reveals why he was fired, his next move,” Yahoo! Finance, July 10, 2019.)
And there you have it: the comparison to tech companies, whereas Constellation Brands saw Canopy Growth as a profit-now venture.
Canopy Growth had made a large number of acquisitions over its lifetime, with one of the more recent major buys being that of Acreage Holdings Inc (OTCMKTS:ACRGF, CNSX:ACRG.U) which, in this writer’s opinion, was a major victory for Canopy Growth Corp.
Sure, it cost the company $300.0 million up front without yielding much in return, but it allowed Canopy Growth to gain a first-mover advantage on its competitors by having a deal set in place that would allow the company to purchase Acreage Holdings when marijuana is federally legalized in the U.S.
This could pay off huge in the near future, but, again, this was against Constellation Brand’s philosophy. It didn’t help sales in the now, so it was a bad move.
“I was of the view this is a rocket ride that will measure earnings per share sometime, but not in an immediately required time and I have $4.0 billion in the bank so the point of that is to spend it,” said Linton.
Constellation Brands, meanwhile, lost $39.0 million due to its stake in Canopy Growth, according to report released just days before Bruce Linton was axed. The two companies wanted very different things, and so Linton had to go.
“I have this idea that massive creative energy focused on a field that’s just coming out of prohibition should be measured on intellectual property achievement [and] novel creations of products as those will be the branded differentiated goods versus a rolled joint,” said Linton.
“And all of these things come with a big cost, and how much is it worth? Call me in five years I’ll tell you.” (Source: Ibid.)
And that’s the thing: we’ll have to wait five years to see how this all turns out. Was Linton’s growth-focused play on the marijuana market reckless dreaming or the plan of a visionary? Time will tell, but frankly, I’m on Linton’s side. Not to mention that share prices for CGC stock have fallen since his departure.
CGC Stock Prediction
Chart courtesy of StockCharts.com
“Creating Canopy Growth began with an abandoned chocolate factory and a vision,” said Linton. “The Board decided today, and I agreed, my turn is over.” (Source: “Canopy Growth Announces Leadership Transition,” Canopy Growth Corp, July 3, 2019.)
That’s how all this began, but since that time we’ve seen a pretty steep decline in Canopy Growth’s share prices.
That does make a good deal of sense, after all. Linton was a well-respected executive and many thought he had a very solid job leading Canopy Growth stock to the spot it currently occupies as the largest marijuana company in the world.
And, frankly, I think the myopic vision of Constellation Brands may actually harm the stock long-term. I don’t think the comparison is entirely fair, but this does remind somewhat of Steve Job’s early termination with Apple Inc (NASDAQ:AAPL) before he was brought back into the fold, helped produce the “iPhone,” and the rest is history.
Not sure exactly how this will play out, but this does, in my mind, have the markings of a similar situation.
Now, as far as my Canopy Growth stock prediction goes, I don’t think it’ll be run into the ground in Linton’s absence. In fact, there’s a decent chance that this may actually turn out alright for CGC stock.
However, as far long-term potential goes, focusing on sales in the now and forgoing establishing a stronger foothold in the global marijuana market gives me pause. I don’t think that’s the right move now, and in the long run it may very well end up hurting CGC stock’s ceiling.
I wouldn’t tell any investors to bail right now, but I am less bullish today with Linton gone than I was last week with him at the helm.
What This Means for Marijuana Stocks
This is just the fist clash between established institutions and marijuana stocks. After all, this isn’t Silicon Valley and these aren’t tech companies, no matter how much pot execs wish they could be treated as such.
There is a dearth of people willing to shell out big bucks without seeing returns for years on end, and most of those people are VCs in southern California. Most investors want a reasonable timeline on return and they want hard numbers, not speculation and potential.
Problem is, this is not the time for hard numbers. Sure, Canada has legalized marijuana, but that is a relatively small country. Markets like Germany and the U.S. are still very closed off to pot and will remain so likely for years to come.
But when they do eventually open, we’re going to see huge explosions in marijuana stock value. Problem is, that will require patience, and patience is not a virtue that boards tend to possess. They want results and they want profit. Such an attitude would have sunk a company like Amazon.com, Inc (NASDAQ:AMZN) years ago.
While marijuana is not tech, there are certain similarities, like building up a consumer base before focusing hard on monetization. Right now is the build phase, but more traditional companies like Constellation Brands don’t see it that way.
Again, it may work out in the end, but hopefully this does not set a precedent in the marijuana business.
If other large corporate investors demand profit immediately, that could ultimately stunt the growth of the current marijuana stocks, and instead pave the way for young upstart companies across the world to dominate their local markets, rather than form global marijuana empires.
For pot investors now, we want to get in on the ground floor of these possible global giants, and so moves like the one Constellation Brands Inc made are not what pot bulls want to see.
The marijuana industry is brimming with potential, but it’s going to need time and money to fulfill said potential. While I believe that CGC stock is still strong, losing Bruce Linton as CEO is a blow that I believe will ultimately cost the company down the line.
As for other marijuana stocks, hopefully they also don’t fall prey to corporate pressure to make money immediately off the very small slice of the marijuana space open now, and instead plan for the green future that will see shares soar.