In the early years of marijuana stocks, after they first hit the market, acquisitions were all the rage. Marijuana companies focused on ramping up production and capacity while expanding their reach across Canada.
But as time went on and the market consolidated around a few major players, pot companies slowed down their acquisitions. But Canopy Growth Corp (NASDAQ:CGC) was recently back in the news for another buy. What does that mean for Canopy Growth stock, and what does it mean for the marijuana industry more broadly?
First, the news.
Canopy Growth Corp has agreed to a $435.0-million deal to buy Supreme Cannabis Company Inc (TSE:FIRE, OTCMKTS:SPRWF). (Source: “Canopy Growth Signs Deal Worth $435 Million to Buy Supreme Cannabis,” Yahoo! Finance, April 8, 2021.)
Some view this is as another acquisition in anticipation of federal U.S. marijuana legalization, as the purchase of the marijuana penny stock will increase Canopy Growth’s capacity and supply chain.
Chart courtesy of StockCharts.com
“Our supply is in balance with our demand, so we just view this as a win on the brand side and a win from a production asset side,” said Canopy Growth Corp’s chief executive officer, David Klein. (Source: Ibid.)
“It also bolsters our path to profitability in Canada, which then positions us to hold that strong set of financial statements for our entry into the U.S. market.”
This comes amid a number of other acquisitions in the marijuana industry that, again, are considered by many to be made in anticipation of more relaxed U.S. pot laws. In fact, Canopy Growth Corp also recently acquired Ace Valley, a Toronto-based operation that makes vapes, gummies, and pre-rolls.
Together with Supreme Cannabis Company Inc, Canopy Growth Corp will account for about 13.6% of the Canadian recreational pot market and about 20% of the premium pot market in Ontario and British Columbia—two of Canada’s richest and most populous provinces.
What’s more, the company will be able to leverage its increased production capacity should opportunities open up in the U.S. market.
And many marijuana companies, Canopy Growth Corp included, have been hungrily eyeing the U.S. market and the possibilities therein.
Remember that there was a lot of excitement surrounding the incoming Joe Biden administration and its potential to accelerate U.S. pot legalization. The reality, however, has been a little bit different than the expectations.
At this point, there’s not a whole lot going on in terms of U.S. pot legalization, other than at the state level. Federal U.S. politics are currently focused on bigger issues. Between the recently passed COVID-19 relief bill and the upcoming major infrastructure bills, it doesn’t look like marijuana will be a priority anytime soon.
That doesn’t mean it’s impossible we’ll see some progress toward federal U.S. weed legalization—a lot can be done by executive orders, after all—but even if President Biden put forward a marijuana legalization bill, it would have virtually no chance of passing through the Senate through regular order, and it’s unlikely that it would qualify for reconciliation.
So all that goodwill toward marijuana stocks (including CGC stock) that surged through the market in early 2021 has dissipated somewhat. But it’s important to note that it doesn’t mean the optimism was unfounded—or that Canopy Growth Corp has been making mistakes by acquiring competitors.
While it’s fair for analysts to criticize the acquisitions as premature due to the distance of federal U.S. marijuana legalization, that misses one key thing: the Canadian marijuana market is growing.
With the Canadian pot black market getting squeezed out by the legal market and production getting cheaper and more efficient (not to mention that the worst of COVID-19’s impact on the supply chain is likely behind us), there’s a lot of opportunity in Canada, regardless of what the U.S. does.
Yes, the U.S. is still the largest marijuana market that’s even remotely close to getting legalization, but Canada still has the opportunity to create billions of dollars in profit for pot companies.
So Canopy Growth Corp’s bet, it appears, is to generate more revenue from the growing Canadian market while things get sorted out politically in the U.S.
“This is a bit about how do we strengthen ourselves in our home market, so that we can be prepared to really make our mark in the U.S. when we can,” said Klein. (Source: Ibid.)
And, in my mind, this is the right bet.
Remember that the marijuana market first gained a ton of traction on the back of the Canadian legal pot market opening. But it wasn’t just the Canadian pot market that got investors excited; it was also that Canadian marijuana companies would be able to develop more efficient processes that would then lower their production costs and increase their profits.
What’s more, Canadian pot companies have been expanding their supply channels and developing their distribution-channel best practices, which could give them a competitive advantage over U.S. marijuana companies that don’t have those practices because they have to—by law—grow, sell, and distribute their pot locally.
Overall, Canadian marijuana stocks are again fighting to be leaders as legalization proliferates. While U.S. pot stocks are challenging them—and it will be a battle—the fact that Canopy Growth stock and others are gearing up for it with moves like acquisitions is a good sign for long-term pot stock investors.
While some analysts may be concerned that Canopy Growth Corp is getting too trigger-happy with its acquisitions, I believe that this is actually the perfect time for pot companies to once again reinvest in order to take advantage of the many opportunities in the market.
By establishing a more robust production network and reasserting its dominance in the U.S. marijuana market, CGC stock is still among the top pot stocks.