Why Canadian Cannabis Company Canopy Growth Has Its Eyes on the U.S.

Cannabis companies had a rough time in the U.S. in 2022, but some of the ones based in Canada are facing an even harder time thanks to a glut in cannabis supply north of the border, which is cutting into margins. 

Aurora Cannabis, with its headquarters in Edmonton, saw its shares drop more than 83% over the past year. Tilray Brands, based in Leamington, Ontario, has seen its shares drop over 54%, while Canopy Growth (CGC -3.01%), headquartered in Smith Falls, Ontario, had a 70% drop in share price over the past year. Not coincidentally, all three cannabis companies saw revenue decline, year over year, in their most recent quarter.

Canopy's turnaround play

Canopy's sales in the second quarter of fiscal 2023 were reported as 118 million Canadian dollars, down 10% year over year. The company cited increased competition in the adult-use cannabis market in Canada as a primary reason for the year-over-year decline. Canopy also reported a net loss in the quarter of CA$232 million, compared to only a CA$16 million loss in the same period a year ago.

Since the report, Canopy announced on Jan. 3 that it was divesting its Canadian retail locations, including stores operating under the Tweed and Tokyo Smoke banners, selling the locations to OEG Retail Cannabis and 420 Investments Ltd. While it is shutting stores, Canopy will still operate the Tweed brand and sell flower, pre-rolled, infused gummies, and cannabis beverages to Canadian consumers.

Looking long-term, Canopy sees more potential south of the Canadian border. It's simple math, really. Canada is the largest nation in the Western Hemisphere in terms of area, but it only has roughly 38.6 million people, fewer than the 40 million people who live in California, not to mention the 334 million who are estimated to live in the U.S. Canopy said it sees the U.S. as a potential $50 billion annual market for cannabis.

Jockeying for position

Last year, five states approved some type of cannabis sales -- recreational or medicinal, led by New Jersey, meaning that there are only 14 states remaining where the drug is still completely illegal.

Cannabis is still illegal at the federal level in the U.S., and multi-state operators face a mishmash of laws and regulations to bring their products to market. Canadian companies aren't allowed to sell in the United States, but if federal laws change to allow the transfer of cannabis across state lines (and from Canada to the U.S.), Canadian cannabis companies still won't be playing on their home turf. In many ways, the regulations will be tilted against them.

However, Canopy is making moves to be ready to sell in the U.S. market, though it won't be under the name Canopy, but Canopy USA instead. In October, the company announced its plan to form a new holding company under that name to handle the company's business interests south of the border, enabling it to acquire cannabis company Acreage, edibles company Wana, and cannabis extract maker Jetty.

A special meeting is expected this month, where shareholders will be given the opportunity to vote on the company's consolidation of its U.S. cannabis assets.

Acreage gives Canopy access to 23 dispensaries across nine states in the U.S. Wana, headquartered in Boulder, Colorado, is North America's largest cannabis-infused edibles producer, with operations in 15 states and Canada. Jetty's high-quality cannabis extracts and clean vape technology are available only in California for now. But the move by Canopy will allow the Oakland-based company to expand to other states, as well as give Canopy another foothold in the state with the most cannabis sales.

On top of that, earlier this month, Canopy increased its ownership stake in U.S. cannabis company TerrAscend (TRSSF -3.32%) from 12% to 18.2%, with the option to own as much as 24.3% of the company, which has vertical cannabis operations in Pennsylvania, New Jersey, Michigan, and California, plus cultivation and licensing operations in Maryland as well as licensed production in Canada.

David Klein, Canopy's CEO, said the moves would allow the company to have a crucial fast start in the U.S. once it is allowed to operate here. It also expects to see certain revenue and cost synergies by consolidating its U.S. cannabis assets. All told, Canopy USA would have a presence in 21 states. The whole process could take until the end of 2024, Canopy said. It may seem like a gamble, but given how sales are trending in Canada, it appears to be a risk the company feels it needs to take.