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Can Drake Make a Difference for Canopy Growth (CGC) Stock?

A partnership with a celebrity can be a great way to establish a new brand in a crowded space such as cannabis. On the surface, Canopy Growth (CGC) forming a partnership with rapper Drake has a lot of appeal. Under the surface, one really has to question why the large Canadian cannabis company is chasing yet another celebrity deal after firing the founding CEO to presumably focus on tighter cost controls.

Another Celebrity

Canopy Growth already has deals with lifestyle guru Martha Stewart, rapper Snoop Dogg and actor Seth Rogan. The addition of Canadian rapper Drake to the lineup only seems to add to an extensive list of celebrity cannabis investments where focus may become lacking and the different brands diluted.

The More Life Growth Company will be based in Toronto and will be 60% owned by Drake and Canopy Growth will retain a 40% ownership position. The company will cultivate, process and sale cannabis at its production facility in Ontario with Canopy Growth running the day-to-day operations.

One really has to question what Canopy Growth sees in a deal for 40% ownership when the company has several other brands like Tweed that need support and brand marketing. Having Drake and his 60 million Instagram followers or any other celebrity promote the Tweed brand seems more beneficial to the company versus the development of an entirely different brand to compete against Tweed.

Jefferies analyst Owen Bennett commented, "While celebrity partnerships have a role to play, these brands are not the key driver of shareholder value. The LPs do not own the full economics for one, and second, they are typically quite niche, appealing to only a small subset of consumers. The true value comes from the fully owned core brands. Here we have our reservations around Canopy, it targeting the market with a "catch-all" hero brand named Tweed, where to date, reviews have not been great and the company has been losing share (most recently we saw provisions for product returns from provinces, presumably the company seeing poor sell-through). For us, we would want to see more evidence of addressing the brand equity on and issues on Tweed, rather than another celebrity deal [...] Every additional celebrity or licensed brand they add, runs the risk of creating customer confusion and even diluting sales around Tweed."

As a result, Bennett reiterated an Underperform rating on Canopy stock along with a C$25.00 price target. (See Canopy's stock-price forecasts and analyst ratings on TipRanks)

Has Anything Changed?

When founding CEO Bruce Linton was forced out back in early July, the presumption was that the executives at Constellation Brands (STZ) wanted the company to focus more on executing on the existing operations. While Canopy Growth hasn’t gone forward with any large-scale deals lately, the company making any investments in entities with only 40% ownership would appear as a process that would automatically get blocked.

Canopy Growth initially popped towards $20 on the news early Thursday, but the stock closed down at the lows around $19. As the market absorbed the news, investors realized that any move that doesn’t move the company towards cutting the massive EBITDA losses in the near term means the company isn’t making the smart decisions.

What the market actually wants is to see the large Canadian cannabis company pull away from deals to sell marijuana in Luxembourg and possibly consolidate the previous celebrity deals to one or two prime investments. The lack of financial details surrounding the investment and the scale of operations makes the deal more difficult to analyze.

Takeaway

The key investor takeaway is that Canopy Growth needs to reign in global expansion plans to focus on areas where the company can cut down the quarterly EBITDA loss of over C$90 million. The fact the stock ended down nearly 2% following the news is a prime example the market isn’t pleased with continued investments in new ventures when the company needs to rationalize all of their existing spending that already includes a full lineup of celebrity brands.

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