It has been five years since alcoholic beverage maker Constellation Brands (STZ -0.16%) first invested in pot producer Canopy Growth (CGC 0.95%). In 2017, it paid $190 million for take a 10% stake in the business. The following year it invested another $4 billion. Today, Constellation Brands owns 38.6% of the cannabis business. However, Canopy Growth hasn't made for a great investment thus far -- its top and bottom lines have struggled, and its share price has collapsed.
But despite the adversity, Constellation Brands remains committed to the business, even after recently incurring a major impairment charge against its investment.
Constellation Brands report impairment charge of over $1 billion
On Oct. 6, Constellation Brands released its most recent results for the period ended Aug. 31. The results weren't pretty: The company's net loss was a hefty $1.1 billion, versus a profit of $11.9 million in the prior-year period. The big reason the company's financials were so far in the red was due to an impairment charge that Constellation Brands recorded on its investment in Canopy Growth. Even so, Constellation Brands shares are down only 10% this year, less than half the decline in the S&P 500 Index.
The drinks maker wrote down its equity investment in Canopy Growth by just under $1.1 billion, and cited multiple reasons for the adjustment. This includes the pot producer's own goodwill impairment charges, the uncertainty around the stock price recovering (shares of Canopy Growth are down 72% year-to-date), and concern about whether the U.S. will legalize cannabis federally.
For the period ended June 30, Canopy Growth reported net revenue of CA$110.1 million ($80 million), which was down 19% year-over-year. During the period, it also recorded a goodwill impairment charge of CA$1.7 billion. Overall, the company reported a net loss of CA$2.1 billion.
Why Constellation Brands remains optimistic
Rather than selling the troubled investment in the cannabis company, which continues to incur losses, Constellation Brands remains committed to the Canadian pot producer. On Constellation's latest earnings call, Chief Executive Officer Bill Newlands said that, "While the impairment of our Canopy investment is clearly disappointing, it is not indicative of a significant long-term market opportunity that still exists for the legal cannabis market."
Newlands specifically pointed to Canopy Growth's pending deals to acquire U.S. companies, including multistate operator Acreage Holdings and edibles maker Wana Brands, stating that the business is "positioning [itself] to have the right brands that will matter over the long run here in the U.S." He also said that "the companies that Canopy invested in to establish its U.S. ecosystem continued to perform strongly and to scale."
Acreage Holdings reported revenue of $61.4 million in the second quarter, a 39% increase from the same period a year earlier. However, the company incurred a net loss of $10.6 million compared with a net loss of $3.3 million in the year-ago period. Wana Brands is a private company, so its financials aren't public. Canopy Growth can't include the results of these and other U.S. companies it plans to invest in because it can't close on these acquisitions until marijuana is federally permitted in the U.S., so it can be challenging for investors to get a view of what the full business would look like today on a pro forma basis.
A big reason Constellation remains bullish is simply due to the potential for the industry as a whole. Cannabis is one of the most promising places to invest in today. Analysts from Fortune Business Insights project that the global cannabis market will grow at a compounded annual rate of 32% until 2028, and by then it will be worth almost $198 billion compared with $28 billion in 2021.
Is this a good sign for Canopy Growth investors?
Constellation's CEO doesn't expect to see a change in the size of the company's investment in cannabis, suggesting that it's content with the current situation. After all, it's not just Canopy Growth that is struggling -- the industry as a whole is underperforming the market. Year-to-date, the Horizons Marijuana Life Sciences ETF is down more than 50% as an oversupply of cannabis, disappointing company financial results, and an uncertain outlook on the prospects of legalization in the U.S. weigh on the sector.
Overall, this is positive news for Canopy Growth investors. One of the reasons the pot stock is among the safest in the industry right now is that it has a major partner in Constellation Brands that can help guide the business (current Canopy Growth CEO David Klein came over from Constellation) and potentially help it expand in the U.S., should federal legalization occur.
It may still be a rough road ahead for Canopy Growth, but for investors who are bullish on the prospects of U.S. marijuana legalization and are willing to be patient, the pot stock could prove to be a profitable investment in the long haul.
