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Canopy Growth: Why Is Constellation Brands Cutting Its Losses?


Nov. 26 2019, Updated 7:54 a.m. ET

Canopy Growth (CGC) (WEED) is one of the most important cannabis players. Notably, Constellation Brands’ (STZ) investment in the company makes it an interesting choice for investors. Since Canada legalized cannabis, Canadian cannabis companies expected to profit tremendously. However, the expectations haven’t materialized. After booking losses this year, Constellation Brands doesn’t plan to increase its investment in Canopy Growth.

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Constellation cuts its losses with Canopy Growth

On November 22, Canopy Growth’s shares fell when Constellation Brands announced that it doesn’t plan to invest more in the company. A Global News article stated that Constellation Brands spoke about its investment in a US regulatory filing. The company expects to book a comparable nine-month net loss of $125.4 million from its Canopy Growth investment.

In Canopy Growth: Constellation’s Presence Can’t Be Ignored!, I discussed that Constellation Brands announced its earnings for the second quarter of 2020. The company discussed the loss incurred from its Canopy Growth investment. Constellation Brands also incurred losses from its investment in the company in the first quarter.

Canopy Growth’s second-quarter results

The most awaited cannabis earnings released this month. Aurora Cannabis, Canopy Growth, and Cronos Group reported their earnings. However, the results disappointed investors.

Canopy Growth reported its earnings for the second quarter of 2020. The company’s revenues of 78.6 million Canadian dollars missed analysts’ estimate of 107.12 million Canadian dollars. The company reported a negative EBITDA of 155.7 million Canadian dollars. To know more, read Canopy Growth Stock Falls after Weak Q2 Earnings. The company’s loss this quarter is another concern for Constellation Brands.

Meanwhile, Aurora Cannabis (ACB) also reported disappointing results for the first quarter of fiscal 2020. The company reported a negative EBITDA of 39.67 million Canadian dollars. Read Aurora Cannabis: Good or Bad News for Its Q1 Earnings? to learn more.

Despite incurring losses, Constellation Brands was confident in Canopy Growth. Constellation Brands was optimistic about the company’s progress and upcoming initiatives.

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What led to Constellation’s decision?

I think that Constellation Brands decided not to increase its investment in Canopy Growth due to the losses. Currently, Constellation Brands has an option to increase its investment. As reported by Global News, Constellation Brands said that it still holds warrants to buy shares before they expire in May next year and in November 2023. The company isn’t sure if it will use the warrants.

I think that this depends on how the sales from Cannabis 2.0 turn out. Edibles and beverage products will hit the stores in December. Cannabis companies can expect revenue growth from edibles and beverage expansion later in 2020, which could decide Constellation Brands’ decision to use the warrants.

Canopy Growth is all set to launch a wide range of cannabis-infused products. In Canopy Growth Is Set to Launch New Product, I discussed that the company announced that it will launch 30 cannabis-infused products. The products include beverages, edibles, and vapes.

Constellation Brands also thinks that Canopy Growth is sufficiently capitalized with more than $2.7 billion Canadian dollars in cash on hand. The capital also gives the company an edge over Aurora Cannabis to take growth initiatives. Aurora Cannabis is struggling with a debt burden, which concerns investors. Read Aurora Cannabis: Why Now is Not the Time to Invest? to learn more.

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Cannabis companies have struggled this year 

Canada legalized cannabis in October 2018. Canadian cannabis companies expected to grow their revenues and profitability numbers. However, fewer legal stores, regulatory delays, regulation scandals, and black market sales impacted the revenues.

Canopy Growth thinks that the new range of products will attract a new consumer base. The company’s research says that 80% of non-cannabis users might want to try a cannabis-based drink. The company is expanding its base into the health beverage market through its investment in BioSteel Nutrition Company.

Edibles and beverages products will hit the stores in December. Notably, cannabis companies can expect revenue growth from edibles and beverage expansion later in 2020. The outcome could decide Constellation Brands’ decision to use the warrants.

Canopy Growth stock fell 9.2% on November 22 after Constellation Brands’ announcement. Aurora Cannabis and Cronos Group (CRON) stocks fell 13.4% and 7.2% on the same day.

On November 20, CNBC reported that the House Judiciary Committee approved a bill to legalize cannabis at the federal level, which boosted cannabis stocks. Canopy Growth stock rose 15.1%, while Aurora Cannabis stock rose 12.8% on November 20. The roller coaster ride in cannabis stocks continues this year. To know more read, Update: Cowen on US Cannabis Market in 2030.

For more cannabis-related news and updates, visit 420 Investor Daily.


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