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What Should Investors Think of Canopy Growth's Deal With Drake?

By Mark Prvulovic - Nov 11, 2019 at 4:19PM

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While good publicity for the cannabis industry, how big of a deal is this for Canopy Growth?

Canopy Growth ( CGC 4.83% ) made headlines last week when it announced a business partnership with actor and musician Aubrey 'Drake' Graham, known as "Drake." For investors who have been disappointed by Canopy's recent financial losses and ever falling stock price, it was a much-needed piece of good news that sent the stock surging as the markets reacted to this unexpected surprise.

While Canopy has made a number of well-known celebrity partnerships with TV show host Martha Stewart, musician Snoop Dogg, and actor-comedian Seth Rogen, it's worth taking a moment to ask whether this recent announcement with Drake changes anything for Canopy's long-term prognosis.

Small cannabis plant held in tweezers with a blurry image in the background.

IMAGE SOURCE: GETTY IMAGES.

What we know about the deal

Announced late last Thursday, Canopy said it was launching a cannabis wellness company with Drake in his hometown of Toronto. Although no specific financial details were shared, Drake has a 60% stake in the company, known as More Life Growth Company, while Canopy will have a minority 40% share in the firm.

More Life Growth owns a license from Health Canada to grow, process, and sell cannabis. Canopy Growth will "provide all of the day-to-day operations and maintenance of the More Life Facility and will retain all of the rights to distribute the product that is cultivated at the More Life Facility."

Besides an official press release from Canopy, the exact details are scarce. However, what news investors did get was enough to send Canopy's shares up 11.8% over the course of the day.

Is this really a big deal?

While it's a symbolic victory for the cannabis industry as a whole, it's uncertain whether this newest celebrity partnership will yield much fruit for Canopy Growth itself. Previous partnerships, as in the case with Stewart, Snoop Dogg, and Rogen, all failed to materialize into anything substantial so far.

Both Snoop Dogg's Leafs by Snoop brand as well as Rogen's Houseplant brand haven't garnered much in the way of financial results. Houseplant, after several months of silence, announced a new series of products including pre-rolled joints and softgel capsules in October, but it's uncertain as to whether these products will end up becoming a significant revenue driver for Canopy. 

As for the partnership with Stewart, she originally hoped to provide advice for a potential animal healthcare product line, but nothing has materialized yet and it's anyone's guess when Canopy will provide an update about a potential animal healthcare product.

The point here is that from a tangible, financial standpoint, Canopy's celebrity partnerships haven't been particularly successful. While good publicity for both the company and the industry, investors shouldn't get too caught up in the excitement surrounding this announcement.

Branding isn't so important after all

While conventional business advice would suggest that branding is crucial in succeeding in a market as crowded as the cannabis space, new data suggests this might not be as important of a factor as first expected. A report from EY that looked into Canadian cannabis consumers found some interesting insights, most notable of which was that most users were far more indifferent on specific brands, with some consumer groups ranking it quite low in what they considered before making a buy. 

Across all consumer groups, whether that be cannabis connoisseurs or just average recreational users, the importance of branding was one of the less important qualities a consumer considered when buying a cannabis product. Potency, pricing, and quality of the product were all considered significantly more important considerations for the surveyed buyers, with branding being – at best – a secondary consideration for most. 

What should investors think?

While branding, and by extension, these celebrity partnerships definitely have a role to play, it's easy to overestimate the impact these collaborations have on Canopy's long-term success. With previous partnerships failing to result in significant revenue streams for Canopy, there's not much reason to think why this new deal with Drake would be much different.

What cannabis investors should pay much more attention to, however, is Canopy's upcoming quarterly financial results. The company is scheduled to report its fiscal second-quarter financial results on Nov. 14, and investors should pay attention to whether the company's margins improved, any news on a potential CEO replacement, and whether it has slowed down its capital expenditures. Considering that in the last quarter, Canopy posted a $1 billion net loss, investors should stay focused on these pressing concerns much more than celebrity partnerships.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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