This Week in Cannabis Investing: Canopy Growth Slims Down

Plus, SAFE Plus finds support, Biden makes a big move and M&A activity in the CBD drink market.

marijuana and CBD oils
(Image credit: Getty Images)

The first generation of cannabis operators in Canada, including Canopy Growth (CGC, $3.75), made a number of unreasonable and costly investments during a frothy period of cannabis capital markets. 

Canada's so-called "Green Rush" was mischaracterized and most of those transactions failed to provide accretive value. We're continuing to see significant write-downs and shuttering as a result of these hasty decisions. Now that the bluster has given way, Canadian companies are adjusting their expectations. 

After business-to-consumer revenue fell by 28% in Q2, Canopy Growth sold off all its retail operations in Canada, including its corporate-owned stores under the Tweed and Tokyo Smoke retail brands. 

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Canopy Growth is divesting from retail to extend its timeline for profitability as a "premium brand-focused cannabis and consumer packaged goods company." The company noted the operational savings from these transactions in an effort to improve CGC's projected general and administrative cost savings. 

Growth opportunities continue to exist for Canada's operators, but the competition in established U.S. markets has stifled their expansion. The U.S. has experienced a lesser degree of frothy capital allocation, and the large operators are demonstrating a difference in fundamentals by increasing gross profits, operating cash flow and securing free cash flow.

Insiders Back Passage on SAFE Plus 

The cost of doing business is much higher for cannabis companies than for other businesses because of the plant's federal illegality. Excessive taxes and a lack of access to banks or financial institutions hamper many up-and-coming cannabis businesses, but change could finally be on the horizon.  

"SAFE Plus," proposed legislation ensuring equitable access to financial services for cannabis businesses, has some probability to pass later this year in the lame duck session. Passing SAFE Plus could open a pathway for US multi-state operators to uplist to major U.S. exchanges.

There is a growing consensus amongst industry insiders that real headway is being made regarding amendments to cannabis policies. This commentary comes from parties working in Washington D.C., and reporting directly about what will be different this time. 

Our enthusiasm remains high for the value of this type of federal action given the potential outsized benefits the U.S. cannabis industry stands to gain. For example, we would not be surprised to see a loosening of capital flows disproportionately benefiting U.S. companies over the listed Canadian companies sidelined from direct U.S. exposure.

Marijuana Stocks See Movement as Biden Issues Cannabis Policy Review

Cannabis investing news made major headlines this week after President Joe Biden pardoned federal cannabis offenses and instructed federal officials to review how marijuana is classified. 

These are historic steps forward for the cannabis investment community. Poseidon has invested in cannabis since 2014, and this is the most important step forward to date. For the first time, we are seeing action from the executive branch on cannabis, and the announcement from Biden could be significant to more progress coming from the legislative branches. There is still so much opportunity for the cannabis industry to grow and changes at the federal level are crucial to the industry's maturation and longevity.

Over the years, we've spoken to countless institutional and strategic capital providers, and the vast majority have been waiting for a federal catalyst before deploying capital. The catalyst provided by Biden's announcement has considerable potential to unlock capital flows in the cannabis space. Shares of cannabis ETFs and marijuana stocks responded strongly, and most hit their highest trading volumes of the year or ever, with only one hour of trading left in the day.

As more investors start to act, there is the potential for continued gains across the industry in the upcoming days and weeks. 

Fervor for Cannabis Beverages Continues to Grow 

Growth in the cannabis beverage category continues with Cann's recent acquisition of CBD drink maker Sweet Reason. The deal is the next step in expanding Cann's brand and reach internationally. 

Beverages are poised to become a much more significant category in cannabis as technology continues to advance. Data from research firm Headset indicates that the U.S. cannabis beverage market share has grown by more than 20% in the last two years.

Operators also continue to further the development of their distribution and retail infrastructure to drive better economics. Per reports, the global cannabis beverages market is anticipated to grow to $2.9 billion by 2028 at a compound annual growth rate (CAGR) of 24.5%, according to global market research firm The Brainy Insights.

At the Benzinga Capital Conference last month, Boris Jordan, founder and executive chairman of Curaleaf (CURLF), expressed serious enthusiasm for cannabis drinks. "Beverages are the big prize ... Personally, five to 10 years out, I think cannabis beverages will make up 50% of the industry.” 

Curaleaf plans to unveil its first cannabis seltzer in Massachusetts and is well positioned in the high-growth product category in one of the East Coast's most mature markets.

Cann also secured $27 million in Series A venture financing from a consortium including Imaginary Ventures and Green Thumb Industries (GTBIF) earlier this year, the biggest Series A financing of a venture-backed cannabis company. 

"The cannabis beverage category is poised for growth," said Green Thumb founder and CEO Ben Kovler. "Consumers are increasingly entering the market seeking alternatives to alcohol with familiar consumption experiences."

Cann's plans to expand into New York, New Jersey and Connecticut in the coming year.

Morgan Paxhia
Contributing Writer

Morgan Paxhia is Managing Director and Co-Founder of Poseidon Investment Management. With over 10 years experience in investing and finance, Morgan has developed a deep understanding of individual company analysis, portfolio construction, and risk mitigation. This content is not intended to provide any investment, financial, legal, regulatory, accounting, tax or similar advice, and nothing should be construed as a recommendation by Poseidon Investment Management, LLC, its affiliates, or any third party, to acquire or dispose of any investment or security, or to engage in any investment strategy or transaction. An investment in any strategy involves a high degree of risk and there is always the possibility of loss, including the loss of principal. This content should not be considered as an offer or solicitation to purchase or sell securities or other services. Any of the securities identified and described herein are for illustrative purposes only.  Their selection was based upon nonperformance-based objective criteria. The content presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance is not indicative of future results.