The past couple of days have seen a number of interesting news developments in the cannabis industry. The biggest of which was when Canopy Growth (NYSE: CGC) announced its new CEO, an appointment that’s long been deferred as investors wondered who Canopy’s new chief executive would be. However, even after Canopy officially announced the appointment of its new CEO, investors weren’t as excited about this news as some would have expected. In fact, pot stocks across the board ended Wednesday in the red as analysts expressed some of their concerns.
One analyst, Bill Kirk from MKM, said that Canopy’s new CEO (who used to be Constellation Brand’s CFO) will bring some much needed financial discipline to the company considering some of its astonishing quarterly losses. However, he’s skeptical about whether won’t be able to solve the many other problems the company is facing. Constellation Brands invested $4 billion into Canopy back in 2018, making it Canopy’s biggest shareholder, and has already given the cannabis giant a chief accounting officer and a CFO to help its financial woes.
“We have harped on some of Canopy’s spending items that seem excessive: 1) equity comp greater than revenue; 2) G&A greater than revenue; and 3) inventory levels which likely don’t match the demand curve,” said Kirk in a note to clients according to MarketWatch. He added that “the mechanisms to address these issues are: 1) lower head count; 2) lower salaries; 3) lower discretionary pay; and/or 4) inventory destruction. None of these paths, while necessary, are good for morale.”
Nor was Kirk the only analyst to echo these sentiments. Seaport Global analyst Brett Hundley went on to say that this appointment wasn’t all that surprising. With Constellation Brand’s major investment hemorrhaging cash, it’s trying to reign things in by further taking over Canopy’s management team. Jefferies analyst Owen Bennett also made a similar point, stressing that this change will likely see some improvements in the company’s financials, but won’t do too much to change Canopy’s business fundamentals.
Canopy Growth dipped by around 3.5% in response to the news but ended up recovering a little and ending the day up only 0.25%. The rest of the cannabis sector went in the red on Wednesday. Canopy’s biggest rival, Aurora Cannabis (NYSE: ACB), fell by 3% over the course of the day, while Tilray (NASDAQ: TLRY), Aphria (NYSE: APHA), and Cronos Group (NASDAQ: CRON) were all down 1.9%, 1.5%, and 1% respectively.
Now that the cannabis industry seems to be past the rapid growth phase, it makes sense that things are tightening up across the board as the hype behind the sector has dissipated. Expect greater fiscal discipline and cost-cutting measures from companies in this space, something that’s a necessary evil for the industry to mature.
Canopy Growth Company Profile
Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization. – Warrior Trading News