Does Canopy Growth need a packaged goods CEO?
In the lightning round on Mad Money, a caller asked Cramer about Canopy Growth. He said that the company needs a packaged goods CEO to make the stock price go up. I think he made the suggestion because Canopy Growth has expanded into the edibles market. Recently, the company announced that it’s looking for a new CEO. According to a Growth Op article, the company will complete the new CEO transition by the end of the current calendar year.
I think that Cramer’s suggestion about hiring a packaged goods CEO would benefit Canopy Growth. Packaged goods products include food, beverages, and cosmetic products. The company has already diversified its product portfolio to the cannabis-infused beverage market with Constellation Brands’ (STZ) help—its largest shareholder.
Will growth strategy boost Canopy Growth stock?
Canada legalized edibles, vapes, and concentrates on October 17. Now, Canopy Growth’s product portfolio will include edibles, beverages, and vapes after Cannabis 2.0 legalization. In Canopy Growth: Getting Ready for Cannabis 2.0, we discussed how the company is increasing its physical store count in Canada from 460 in September to 600 by March 2020.
Canopy Growth and Constellation Brands will launch cannabis-infused beverages. Recently, Canopy Growth also acquired BioSteel Nutrition Company to add cannabis-infused health beverages to its portfolio. The company will also launch CBD-based products for human and animal use with Martha Stewart. With so many growth initiatives, I agree with Cramer. A CEO with packaged goods experience would definitely help the company and its stock price. Expanding into a new product portfolio will increase operating costs and impact margins.
Canopy Growth has already been struggling with profitability this year. In the first quarter, the company reported a negative EBITDA. Canopy Growth also missed the top-line and bottom-line estimates.
Other cannabis companies are struggling with negative EBITDA. Aurora Cannabis (ACB) reported a negative EBITDA in its last reported quarter. The company will expand its edibles market by producing edible products, like gummies and chocolate, for consumers starting in December. The Aurora Polaris facility will also produce edibles like chocolates, hard baked goods, mints, and infused beverages.
However, Aphria (APHA) reported a positive EBITDA in its recent quarter. The company reported a positive EBITDA of 1.0 million Canadian dollars. Aphria surprised analysts and investors due to pessimism in the cannabis space this month after Hexo’s disappointing news.
Canopy Growth stock has also suffered this year. The stock has fallen 27.4% year-to-date. Meanwhile, the stock has fallen 12.4% in October. Aurora Cannabis and Aphria have fallen 16.1% and 8.4%.
Linton’s view on Cannabis 2.0
Bruce Linton, Canopy Growth’s ex-CEO, seems pretty excited about Cannabis 2.0. He thinks that launching a variety of legal cannabis-based products could help reduce black market sales. Linton thinks that legalization will help create safe and health-friendly vaping products that won’t contain Vitamin E or pesticides, which could have any side-effects. Vaping devices created havoc in the US. Federal marijuana legalization would help tackle vaping concerns in the US.
Linton even sounded optimistic that Canada might see Cannabis 3.0 and Cannabis 4.0 very soon if this phase generates revenues. According to Linton, “3.0 is when companies start reading data. Which is what happens when you have clinical trials. If some companies can read data that says this combination of ingredients causes you to sleep for seven hours uninterrupted, that starts to compete with over-the-counter and some pharmaceutical products.”
He also said, “4.0 is when you start doing research when you start saying with rare cannabinoids and stem cells and how they interact, can we make curative products? Can we shrink a brain tumor?” He said, “I think 4.0 is when you move to that curative state, 3.0 is when you move to help grandma and grandpa or me sleep better, and 2.0 is when you have better products available.”
What do we think?
While Canopy Growth looks for a new CEO, Linton has joined three companies in an advisory role. The excitement and optimism around Cannabis 2.0 looks good. However, the products will take time to hit the markets and show results. The company won’t report higher sales and profitability until next year. Canopy Growth mentioned at the Barclays 2019 Global Consumer Staples Conference that it’s targeting a $1.0 billion annual run rate and a 40% margin by the end of the fourth quarter of fiscal 2020. Canopy Growth will report its results for the second quarter of fiscal 2020 next month. We’ll have more updates on the company’s growth strategies and expansion. Meanwhile, we’ll have to wait and see what other factors could impact the cannabis sector and cannabis stocks.
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