Entering the U.S. market is a core part of Canadian pot producer Canopy Growth's (CGC 2.18%) overall strategy. It's been four years since the company first announced plans to acquire multi-state marijuana operator (MSO) Acreage Holdings. Since then, it has pursued even more U.S.-based businesses, including Wana Brands and Jetty Extracts.
Last year, the company also announced plans to launch Canopy USA, a special purpose vehicle that will potentially hold its interests in U.S. companies. While the Nasdaq (NDAQ 0.32%) objected to the approach, Canopy recently restructured that arrangement in a way that management believes will allow Canopy USA to exist without upsetting regulators.
Has Canopy Growth found a way to enter the U.S. pot market?
No easy task
U.S.-based cannabis companies can't trade on the Nasdaq Exchange or the New York Stock Exchange because they operate in industries that are technically illegal, according to federal law. While some states have legalized both medical and recreational marijuana use, there's been no progress when it comes to federal permissibility of pot, and that's what matters to the exchanges.
This makes it challenging for a company like Canopy Growth, which wants to invest in U.S. businesses and consolidate those positions but can't technically do so. Otherwise, it would risk losing its Nasdaq listing. Being able to trade on a top exchange gives it an advantage over MSOs that can't do so. It also means Canopy has access to a smaller pool of investors.
New arrangement to avoid issues with Nasdaq
On May 22, Canopy Growth announced that it had modified its structure for Canopy USA so that the entity won't ruffle feathers with the Nasdaq. One of the key changes is that the company will have no more than a 90% economic interest in Canopy USA. It's also making changes to the structure of the entity's board.
The biggest change, however, is that Canopy Growth will no longer consolidate the results of Canopy USA under this new arrangement. This is likely disappointing for the company, as this was probably a key motivation for creating Canopy USA. The company's sales growth has been underwhelming in recent quarters and revenue from the U.S. market would have made its financials look much stronger.
CGC Revenue (Quarterly YoY Growth) data by YCharts.
A scenario I could see happening is that the company reports adjusted revenue numbers and financials that show what Canopy Growth's business would look like if its interests in Acreage Holdings, Wana Brands, and other U.S.-based entities were consolidated. Cannabis companies already report many adjusted sales and profit figures, so it wouldn't be out of the question to assume that Canopy Growth could include yet another set of adjusted financial numbers in its financial reports.
Canopy Growth isn't technically in the U.S., and that won't change soon
Despite Canopy Growth's desire to enter the U.S. market, there's no reason to expect it will soon gain a foothold in the U.S. cannabis industry. Until legalization happens, which could be many years away, creating Canopy USA is about the most the company can do at this point -- and that's if shareholders approve the move in a future meeting (which is still to be determined).
Ultimately, these changes don't amount to much actual change. Without consolidating the results, all this really adds up to is some adjusted numbers showing what might have been if the company operated in the U.S. to present to current and potential stockholders. Investors shouldn't assume that the launch of Canopy USA will truly "fast track" any entry into the U.S. As long as marijuana remains illegal on a federal level, there won't be any entry to make at all.
Is Canopy Growth stock a buy today?
The only way I see Canopy Growth paying off as an investment right now is if you hold it until the U.S. legalizes marijuana. But the danger is that by the time that happens, the competitive landscape in the industry could look much different, and the companies that Canopy Growth is banking on for growth may not be in the same positions they are right now.
Given the uncertainty ahead, this isn't a stock that would be suitable for most investors' portfolios. Canopy Growth's valuation is down more than 80% in just the past 12 months, and it's possible it will fall even further as there's no growth catalyst out there to spark new investor interest. With many other growth stocks to choose from, it isn't worth risking your money on this investment.
