Constellation Brands (NYSE: STZ) teaches the difficult way that the business of selling cannabis presents challenges unheard of in the beer and wine industry. Immediately after harvesting $ 4 billion to Canopy Growth (NYSE: CGC) in November last year, it became clear that the sale of licensed marijuana would be much more difficult than raising money to sell marijuana. .
Constellation Trademarks received a 37% stake in Canopy Growth, and the beverage company now shares four board members with the cannabis manufacturer. There is enough shutdown to avoid the most responsible for accelerating losses that have pulled Canopy shares 23% lower since the start of legal use of marijuana in Canada. This was the right move for a long list of reasons, and these three were the most important.
. How much for what?
Bruce Linton was called many things since the co-founding Canopy Growth in 2013, but a cautious asset manager was not one of them. Despite operations that produced consistent losses, Linton monitored many questionable investments.
For example, Canopy recently delivered [$ Acreage Holdings (NASDAQOTH: ACRGF) $ 300 million for an alternative to buying the company for $ 3.4 billion – with a catch. The US must legalize the production and sale of cannabis before a company ceases to exist. Since this would dry out Canopy's $ 3.5 billion cash cushion, the company will create many new shares to complete the transaction if necessary.
In 2018, Acreage reported operating expenses reaching $ 94 million. That was 345% more than the top line revenue recorded in the same period, which led to an operating loss of $ 68.7 million last year.
2. A gross miscalculation
It doesn't matter how fast an industry grows and spending money you don't have to pay for companies that bleed money is a recipe for disaster. Investors have been willing to look in the other way as spending, thanks to rose-banked investment bank predictions, eager for more business from the growing industry.
For example, Stifel said the licensed cannabis market, which rocked $ 8 billion in global sales last year, will grow to $ 200 billion over the next decade. Of course, this assumes that the illegal market only evaporates itself, which is obviously not the case.
Daily investors are often outweighed by investment bank estimates with resting, but industry insiders should know better. Linton's purchase of everything under the assumption that analysts were right is inexcusable.
Anyone who thought about marketing licensed cannabis in the EU or South America would be easier than that in Canada must be unfamiliar with the Netherlands and Spain. Despite huge spending on entering international markets, sales outside Canada reached only $ 1.8 million in Canadian dollars during the first three months, which was even smaller than in the previous quarter.
3. Commercial Flop
Canopy does not plan to deliver top quality cannabis at a competitive price with any success level. Its Tweed stores and cannabis brand are well known, but reported results suggest that the company does not receive many repeat customers.
Advertising for cannabis to consumers did not begin until 17 days in the fourth quarter of 2018. During the first three months of 2019, sales to consumers increased only 1.6% compared to the previous, shortened quarter. At an annual size of $ 46.7 million, Canopy Growth needs a huge sales explosion just to break even. During the year ended March, the business lost $ 577 million.
Canopy Growth and his peers have complained about kinks in the supply chain, but the data says something else. Health Canada measured 393,110 kilograms of finished stock in late April and another 421,035 kilograms of unfinished inventory.
Licensed manufacturers are still waiting for a completed set of rules before making edibles, beverages, and vaporizer cartridges later this year, but it does not explain fast-growing inventories that are already large enough to theoretically meet the country's licensed cannabis needs in more than one years without producing another gram.
Cannabis has a shelf life limited to a couple of years under ideal conditions, and much less if exposed to heat and moisture. At the end of March, Canopy Growth reported an inventory value that was 42% higher than it was just three months earlier. Unless the company's restructured management can withdraw from a miracle, expect significant inventory write-downs by the end of 2019.
If you think the stock has fallen sharply recently, keep in mind that Canopy Growth is still a $ 14.3 billion company continues to report accelerating losses and has no clear path to sustainable profits. It's time to get out of this ship before several investors realize it's heading for an iceberg at full speed.