Canopy Growth Corp., the Canadian cannabis company that is the market leader thanks to a $4 billion investment from a major drinks company, will not be profitable on a per-share basis by fiscal 2022, MKM analyst Bill Kirk said Friday.
Canopy shares slid 2.2% in early trade and are down 31% in 2019.
“Unlike market expectations, we do not expect Canopy to become a profitable organization by FY2022 (on EPS),” Kirk wrote in a note to clients. “Current spending is the beginning of what is needed to capture future profitable opportunities. Existing cultivation businesses will continue to be under pressure as more supply comes online.”
The Canadian cannabis sector has suffered a prolonged stock slump in the past few months, as the rollout of legal cannabis has advanced far more slowly than expected. Companies have been hurt by a severe shortage of retail outlets as licensing is hampered by regulations that have allowed the black market to thrive. As a result, revenue has not lived up to expectations and most companies continue to post heavy losses.
Other challenges now facing Canopy include the unpredictable outcome for brand differentiation in what is a whole new sector. Canopy CGC, -1.17% WEED, -4.03% should benefit from better R&D than peers, thanks to the investment from Corona beer maker Constellation Brands Inc STZ, 0.17%, said Kirk.
But the Smith Falls, Ontario-based company’s losses are also due to an excessive executive compensation policy, while inventory levels remain a risk if demand does not materialize or is delayed, he said.
Canopy’s losses frustrated Constellation so much earlier this year that they ousted the company’s co-Founder and co-CEO, Bruce Linton. The executive defended the company’s executive compensation policy in an interview with MarketWatch in June, saying he believed it was important to assign stock rewards to all staff as a way to strengthen the business.
Kirk offered 10 questions he suggests analysts attending Canopy’s Dec. 3 investor meeting should ask as the company gears up for Cannabis 2.0, the name given to the launch of derivatives, including edibles and beverages in Canada:
1. How does the FDA’s updated stance on CBD impact your plans for CBD beverages in the U. S.?
2. How much more labor do the 2.0 products require compared to the current portfolio?
3. Is employee morale impacted by the plans to cut executive compensation?
4. Why have your peers struggled to have a THC Beverage ready for 2.0?
5. Has any industry opened 40 stores during a month in a single province?
6. Compared to six months ago, have your plans for vape changed (marketing, resources, etc.)?
7. With such low levels of oil inventory, do you have enough to meet 2.0 launch demands?
8. What is most important for getting share from illicit (pricing, 2.0, enforcement, or quality)?
9. What facilities are best for you to service Europe?
10. Does STZ’s (Buy, $184.06, $256 PT) comment about no more cash contribution (aside from warrants) surprise you?
The first question refers to this week’s updated guidance from the FDA on CBD, the cannabis ingredient that is non-intoxicating and widely held to have wellness properties, even though it has not been widely researched. Because the regulator has approved a CBD-based drug—GW Pharmaceuticals’ GWPH, 1.67% Epidiolex, a treatment for severe forms of childhood epilepsy—it views CBD as a drug.
The FDA is tasked with coming up with a set of rules for the substance, but said this week it can cause liver damage and other harm to the human body. The news is a blow to Canopy and peers, who were hoping CBD would provide an easy pathway into the U.S. market, which is expected over time to become the biggest cannabis market in the world.
For more, don’t miss: ‘CBD has the potential to harm you,’ FDA warns consumers
The company is developing a line of Tweed-branded drinks with 2 mg of THC per can, as well as Houseplant Grapefruit and Houseplant Lemon drinks that are part of a partnership with actor Seth Rogen and screenwriter and producer Evan Goldberg. Those drinks will contain 2.5 mg of THC per 355 mL can.
The company is also planning seltzer-like sparkling water products under the new brand Quatreau, that will contain 20 mg of CBD or 2 mg CBD and 2 mg THC per can. For consumers looking for a more potent drink, the company is developing a brand of mixers that will be packaged in 150 mln bottles using its propriety clear liquid cannabis.
The ETFMG Alternative Harvest ETF MJ, -0.06% was down 0.4% Friday and has fallen 31% in 2019. The S&P 500 SPX, -0.40% has gained 26% in the same time frame, while the Dow Jones Industrial Average DJIA, -0.40% has gained 20%.