In July 2019, Canopy Growth (NYSE:CGC) rocked the cannabis industry when it announced that Bruce Linton would no longer be leading the company as its co-CEO, leaving Mark Zekulin as the sole CEO at the time. The move came less than a year after Constellation Brands (NYSE:STZ) increased its investment in the pot producer. From an initial 9.9% investment in 2017, the beer maker made an additional $4 billion investment in 2018, upping its stake in the company to 38%.
Whether the firing was due to Canopy Growth's poor performance weighing down Constellation's financials or disagreement on where to go next is anyone's guess. But Linton helped make Canopy Growth what it was and still is: an industry leader and an iconic company during what are still the very early stages of the legal cannabis industry. Let's take a look at how Canopy Growth has performed since his departure and whether it is better off.
The stock is down 60%
The company let Linton go in early July, shortly after Constellation Brands released its first-quarter results, which were dampened by Canopy Growth's losses. Since the start of July -- before the announcement of a change in leadership -- Canopy Growth's share price is down about 60%. However, that's not to say that the stock's decline is entirely due to his departure; the industry as a whole has suffered. The Horizons Marijuana Life Sciences ETF, for instance, is down even more during the same period -- 62%.
The reality is that pot stocks were already starting to decline even before Linton's departure. With losses getting deeper and companies such as HEXO (NYSE:HEXO) abandoning aggressive forecasts, Canopy Growth would likely have been unable to avoid falling right along with the rest of the industry. But the move away from Linton signifies a turning point -- a moment when investors stopped blindly believing that sales growth would remain strong across the sector and that companies would somehow make everything right. Instead, investors are now more focused on profitability and cash flow, metrics they should've been looking at in the first place. The hype has died down, and as a result, share prices have taken a beating.
Is the company any closer to breakeven?
Shortly before Linton's firing, Canopy Growth released its fourth-quarter 2019 results, in which it recorded a loss of 336 million Canadian dollars. That was worse than in the third quarter, which saw a profit of CA$68 million -- the last time Canopy Growth was in the black. However, one of the challenges of looking at net income or loss for cannabis companies is that these metrics can often be distorted by other income and nonoperating items.
That's why looking at operating income can paint a more accurate picture of how the company has performed. In the fourth quarter of fiscal 2019, operating income was negative CA$174 million. Although the loss was smaller -- CA$123 million -- in the first quarter of 2020, it deepened to a loss of CA$266 million in the second quarter and a loss of CA$172 million in Canopy Growth's most recent quarter. Even though the company's third-quarter 2020 net revenue of CA$124 million is up 32% from its fourth-quarter 2019 sales of CA$94 million, Canopy Growth's operating income is no closer to breakeven than it was when Linton left.
But it's also important to remember that Canopy Growth didn't name a replacement until December, when it said Constellation CFO David Klein would be taking over. And with the company announcing layoffs earlier this month, this might just be the start of the cost-cutting measures that are needed to improve the bottom line.
Takeaway for investors
It hasn't quite been a year since Linton left Canopy Growth, and there have been no significant improvements in the company's financials. Given the industry's struggles and the many pot stocks performing even worse than Canopy Growth, it doesn't appear that its CEO was reckless in spending or that he was the reason for its poor results. Instead, it's likely that the industry's early growth stages are to blame, particularly the disappointing process in legalizing cannabis in Canada that's resulted in too few retailers available to support the industry.
It's still too early to tell whether Canopy Growth is better off under different leadership, with Klein only recently taking over. While Canopy Growth is coming off a strong quarterly performance, it still has a long way to go in getting to breakeven. Although the pot stock might be more of a buy now than when Linton was let go, that's mainly because the stock is at a more realistic valuation as opposed to the business being any stronger.