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3 Big Challenges Canopy Growth Faces After Its Tremendous Q3 Results

By Keith Speights – Feb 19, 2020 at 7:32AM

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The biggest cannabis producer on the planet knocked the ball out of the park in Q3. But what's next for Canopy Growth?

Canopy Growth (CGC -25.60%) is full of surprises these days. The company blew past Wall Street estimates with its fiscal 2020 third-quarter results last week. Its bottom line even trended in a positive direction. And while its top rival, Aurora Cannabis, emphasized the issues with the low number of Canadian retail cannabis stores, Canopy credited a growing number of retail stores as a big factor driving its revenue growth.

But don't think for a minute that the road ahead is an easy one for Canopy Growth. New CEO David Klein acknowledged the difficult trek ahead in the company's Q3 conference call, stating, "Make no mistake -- we have a lot of work to do." Here are three especially big challenges that Canopy Growth still faces after its tremendous performance in Q3.

Blue-gloved hand holding a cannabis leaf in front of a Canadian flag

Image source: Getty Images.

1. Achieving profitability

By far, the greatest undone task for Canopy Growth is to achieve profitability. It's the biggest negative associated with most Canadian marijuana stocks, including Canopy. You might be surprised, though, that David Klein listed defining a path to profitability and positive cash flow as only his third-highest priority.

However, Klein's two top priorities are important steps in the company becoming profitable. His No. 1 priority is to improve Canopy's connection with its customers. He realizes that the best way to achieve financial success is to grow the top line, and the best way to increase sales is to market products that customers love. Klein's No. 2 priority is "bringing more focus and discipline" to the company. He said this "means deciding where we won't play as well as where we will."

Look for rightsizing from Canopy Growth both in terms of employees and production in the next three months as part of the quest to become consistently profitable. The company has already begun the process of aligning its inventory with its projected demand. But Klein said that Canopy hasn't scrambled to cut staff across the board as some in the industry have. His approach is to first "understand where we need to win and where we want to win and where we can profitably play in the businesses." Canopy will then invest in the targeted areas and cut spending in other areas.

2. Succeeding in the U.S.

No Canadian cannabis producer has moved as quickly to secure a place at the table in the huge U.S. market as Canopy Growth has. The company jumped into the U.S. hemp CBD market soon after hemp was legalized in the U.S. It also struck a deal to acquire U.S.-based cannabis operator Acreage Holdings if marijuana becomes legal at the federal level in the United States.

Canopy even launched its first hemp CBD products under the First & Free brand in December 2019. It's fair to say that Canopy hasn't yet succeeded in the U.S. market. Klein said, the company wants and needs "to move faster and make bolder moves in the U.S." 

Moving faster and bolder doesn't mean investing more heavily in the U.S., though. Klein stated that the primary goal for Canopy in the U.S. market is to get its brands on retail shelves as much as possible. The First & Free launch was primarily through online channels.

Canopy plans to focus now on establishing a solid retail channel in the U.S. for Fire & Free and its other CBD products. It seems likely that Klein will use his connections at his former employer and Canopy's largest shareholder, Constellation Brands, to help build a strong distribution network in the U.S. for Canopy's products.

3. Proving its big Cannabis 2.0 bet will pay off

One of Klein's first acts as Canopy Growth's CEO wasn't a pleasant one. Only days after taking the helm, he had to announce an embarrassing delay in the company's launch of cannabis-infused beverages in the Canadian Cannabis 2.0 market.

Some industry observers were already skeptical about the prospects for cannabis-infused beverages. Such beverages haven't been tremendously successful in the U.S. so far. But Canopy and its partner Constellation Brands have bet heavily that there will be a market for beverage products.

Klein shared an anecdote in Canopy's Q3 conference call about several members of the company's board of directors recently tasting "live versions" of Canopy's cannabis beverages. He said that after this tasting, one board member sent him a text that read, "Game changer." Klein believes that that sentiment is spot-on. He said that Canopy continues to "see our cannabis beverage[s] as truly disruptive and the best vehicle to attract new consumers to the cannabis market."

But while Canopy Growth thinks that is big Cannabis 2.0 bet on beverage will pay off, it's going to take a longer-than-expected time for the company to prove it. Klein didn't provide an estimated launch date for the new products. He only said that "we are going to take the next few months to get it right and ensure that we can introduce our consumers of today and of the future to a true game-changer."

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
$2.79 (-25.60%) $0.96
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$222.70 (-4.22%) $-9.82
Aurora Cannabis Stock Quote
Aurora Cannabis
$1.16 (-12.78%) $0.17
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.

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