U.S. Markets closed

Canopy Growth's Drake Deal Eases Pullback as Q2 Earnings Near

Christopher Vargas

Canopy Growth CGC is set to report its second quarter results before the market opens on Thursday, November 14. The largest marijuana company in terms of market cap has seen its stock spiral down 55.3% over the past 6 months. Marijuana stocks in general have pull backed as regulatory complications in Canada have stalled operations.

However, Canopy Growth recently saw its stock tick higher last week after it announced a new partnership that excited investors. After all the volatility that has hit the company, Wall Street now has its sights set on the cannabis producer’s Q2 earnings report.

Setbacks Send Stock Spiraling 

The last six months have not been good for pot stocks as billions of dollars have been lost in market value. Canopy Growth is no exception, losing around $10 billion over that same time period. A major contributing factor to the stocks’ underperformance is the supply issues currently plaguing the Canadian market.

Regulatory agency Health Canada came into 2019 with a backlog of more than 800 applications to review. The regulatory agency will likely need several quarters to work through the backlog, bringing lengthy delays to marijuana products trying to enter the market.

Canopy Growth has also experienced setbacks within the newly federally approved derivative market.  The official opening of the market for derivative cannabis products in Canada officially happened in mid-October, which opened the door for Canopy Growth to cash in on higher margin cannabis products. However, the delayed launch of the derivative market won’t be materializing any profits for cannabis companies until these products hit shelves in mid-December.

On top of the stalled derivative products, certain derivative products like alcohol-based beverages will remain illegal. This forces Canopy Growth and its partner Constellation Brands STZ to work around yet another regulatory obstacle. The cannabis derivative market is also poised to face the same supply issues that the dried flower space has been experiencing.

Investors should also note that while the derivative market may appear lucrative because of its higher margins, the fierce competition Canopy Growth will have to contend with shouldn’t be overlooked. The stiff competition paired with the probable supply issues that the market will face will more than likely push back any material impact from the derivative market.

Will the Drake Deal Bear Fruit?

Canopy Growth announced late last week that the company had entered a partnership with pop culture icon, Drake, to open a cannabis wellness firm in Toronto. Drake has a 60% stake in the company, known as More Life Growth Company, while Canopy will have a minority 40% share.

More Life Growth owns a license from Health Canada to grow, process, and sell cannabis. Canopy Growth will "provide all of the day-to-day operations and maintenance of the More Life Facility and will retain all of the rights to distribute the product that is cultivated at the More Life Facility."

The announcement was enough to send Canopy Growth shares up over 11% as investors were excited to receive good news about the struggling pot stock. The Drake deal isn’t the first partnership Canopy Growth has had with a celebrity.

Past partnerships include Martha Stewart, Snoop Dogg, and Seth Rogen, which have all failed to turn into anything substantial thus far. Snoop Dogg and Seth Rogen’s brands have failed to produce sizeable financial results, and Martha Stewart’s efforts to kickstart an animal healthcare product line haven’t materialized yet.

Bottom Line

The cannabis industry still faces an onslaught of regulatory issues that don’t seem to be going away anytime soon, which will more than likely bring further volatility to the marijuana space. While effective branding and marketing may be vital components to driving sales in other fields of business, it seems that in the marijuana industry that may not be the case. Recent studies actually suggest that branding is a less important quality considered when consumers purchase a product.

Investors will now be looking to Canopy Growth’s Q2 report to see whether the company has improved its margins and eased its capital expenditures. Our Q2 consensus estimates forecast Canopy Growth’s earnings to grow over 64% to a loss of $0.27 per share and for net sales to grow over 330% to $77.1 million.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>

Click to get this free report Constellation Brands Inc (STZ) : Free Stock Analysis Report Canopy Growth Corporation (CGC) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research