What happened
Shares of Canopy Growth (CGC 1.84%) tumbled 21.3% in February, according to data from S&P Global Market Intelligence. The marijuana stock reported worse-than-expected fiscal third-quarter earnings and announced a restructuring of its business that will see it exit the cannabis flower cultivation business and move to a third-party sourcing model for cannabis beverages, edibles, vapes, and extracts.
Canopy Growth's transition to an asset-lite business model gives the appearance it is planning to all but exit the Canadian market and set up shop as a U.S.-based marijuana company.
Image source: Getty Images.
So what
The Canadian government massively botched the rollout of marijuana legalization in 2018 that the industry still has not recovered from. You can almost sense the exasperation Canopy CEO David Klein holds toward the effort, as he told analysts on the pot stock's earnings conference call that "there are two very different cannabis markets in Canada: one that's legal, highly taxed, and regulated; and one that's thriving and illicit."
The call for regulation and taxation of legal marijuana is one that has always been fraught with risk, as companies playing by the rules face costly rules and costs that illegal pot sellers do not. When it's cheaper to buy illegal marijuana than legal, the latter will ultimately fail.
That's apparent in Canopy Growth's fiscal third-quarter earnings report, where sales plummeted 28% in the period as losses doubled year over year.
Canopy is being forced to take large restructuring charges as a result of it also divesting its retail business in the range of $310 million to $383 million at current exchange rates. Some $18 million to $33 million is expected to be cash charges.
Now what
The market, as well as Wall Street, took a dim view of the developments, with analysts at various firms knocking down their price targets on the stock.
While Roth MKM analyst Bill Kirk also cut his target, he actually maintained a buy rating on Canopy Growth. This is because, despite sales deceleration, market share losses, and margin compression, he told investors in a research note the marijuana company is showing it is willing to make difficult decisions in its quest to achieve profitability, which bodes well for the business.
