Criticizing pot companies can be hazardous to one’s career – but there has to be a robust dissection of the industry now to ensure its healthy growth in the near future
There is something about seeing Reuters flash a story about the plunging share value of any cannabis company, let alone Canopy Growth, which brings both sadness and a sense of accomplishment right now on a personal level.
There are several reasons for this – beyond the fact that I was just penalized professionally (again) for criticizing another North American cannabis company, for similar behaviour and traversing a remarkably similar path. Namely hype the hell out of the company on social media, raise millions if not billions, and expand by M&A (of preferably the stock swap, not cash infusion kind). When I published a story questioning the interesting timing of the departure of the founder, Bruce Linton, in 2019, Canopy Growth threatened both me and my editor at the time, that they would never work with either one of us again.
So far, we have both been right in our assessment that this was an empty threat.
Here is the biggest reason for that analysis – three years ago. Canopy was the baddest of the bud boys in both Canada and Europe for a period that stretched from about 2016 to the tail-between-the-legs departure of the company’s founder, Bruce Linton, in July 2019. The fact that their stock was just delisted
appears to be just one more nail in the coffin of a company that only four years ago was eliciting multibillion dollar investments and in the space of just 12 months. Yet current executives are saying this is all part of the (next) reorg strategy. In that kind of environment, what is a two billion dollar loss in a quarter after all?
Unsustainable Business Models
The first problem with companies like Canopy (and they are far from alone – I have written two books about the same), is that the current business models on which the cannabis industry – both private and public entities – are generally not sustainable in the current, semi-reformed environment.
Public companies – the preferred model in Canada (and in the US although much harder to achieve because of the lack of federal reform) – are fundamentally not suited to weather the many ups and downs of this stage of the revolution. There are just too many regulatory landmines. The impact of just this liability on operating models internally, beyond any responsibility to public markets, is large.
Timing is everything.
Issues like cultivation take on a literal hit or miss proposition as many corporate cannabis companies have learned to their peril. So do all the other steps of manufacturing. And that is, unlike CannTrust, if they actually take compliance seriously. There are many in the market today, particularly the American market now eyeing German expansion, who still do not.
Private companies, however, are not necessarily the answer either, even though they are more common in places where there is a regulatory monopoly created to justify if not necessitate their existence. See Bedrocan in Holland, Alcaliber and their cannabis-related spin-off Linneo Health in Spain, plus Demecan and Cansativa in Germany. And while an IPO is not necessarily out of the picture, particularly aus Deutschland right now, it doesn’t mean that, come recreational reform, these companies will inevitably go public. Most Europeans do not invest in the stock market in the same way as North Americans. And then there is the Juicy Fields scandal, for starters, to make a highly sceptical German public, in particular, even more concerned about the same. The world has not moved on very much from 2018 when all the then major big Canadians came to Frankfurt both to drum up interest in their stock price as well as convince the then-health Minister, Jens Spahn, to go easy on them as well as settle the bid. The fact that the second set of lawsuits was launched that weekend, delaying the final bid decision until the spring of 2019 was just one sign that the Germans were not going to be so easily convinced of the profitability of the new biz in town.
Canopy Growth, just like the other big public North American companies now sucking so much oxygen out of the air, was just the first round of companies to fail. They won’t, by any measure, be the last.
Investing In the Green Rush Is Rarely Good For ROI
Just ask Bruce Linton (and many have, even if not to his face). Investing in the “Revolution” is rarely profitable. This is not the railroads, or even the internet, and, despite the success of a very few in both as well as other revolutionary verticals, the success rate in the aforementioned verticals wasn’t either.
That is not to say there won’t be a profitable pot company, or that there have not been so far. That said, the dangers to the same from the regulatory environment almost preclude it to date.
Regulations from Novel Food to the pending recreational market, make the reality of realizing longer term ROI for investors almost an impossibility in most business models right now. Shorting the market seems to be the only sure-fire way to make any money in this part of the biz – a strategy that gags any cannabis advocate and even cannabis stock investor who is not a day trader.
That includes not only the North Americans but also in places like Germany, where there are now approximately 190 cannabis specialty distribution licenses. This is ridiculous in a country of 80 million people.
In the meantime, being big pot means spending a great deal of money, including paying the top execs hefty pay checks, and being deaf to the concerns of investors. Losing money is more common than making it.
RIP Canopy Growth?
Here is the thing about proclaiming tombstones (of any kind) in this still evolving industry. There is always a comeback play. Europe is on the verge of recreational reform, and if there is one thing the Canadians managed to do well, it was plant the seeds of their brand early for the chance of a reboot later. Canopy owns Storz and Bickel, the medical vape that still has majority market share here even though they just sold their other large German cannabis company acquisition for a loss. Then of course there is the pending merger with Acreage, should US federal reform become a reality in the near future.
The current crop of execs at the company swear that this is just a temporary blip – and it may well be.
That still does not answer a much bigger question now being asked by all those early retail investors who have to think about the long term if they ever want to see a return. Was it worth it? And will it be any time in the near future?
It is not to say that Canopy may not turn it all around to become, as Linton once prophesied, the “Google” of the cannabis industry. Or even the Apple. It is certainly still in the realm of the possible.
It is just one more step removed from the same.
And in the meantime, the search continues for a path to profitability for most in what is certainly one of the most revolutionary industries of our lifetimes.