Smiths Falls, Ontario-based Canopy Growth (NYSE: CGC) is, in many ways, the epicenter of the legal marijuana industry. Despite the steady decline in its share price since the legalization of adult-use recreational marijuana in Canada last October, the company is still the only borderline large-cap company in the industry, as well as the market share leader in terms of annual sales. Canopy also sports the richest tie-up with a noncannabis company through its roughly $5 billion CAD equity investment from alcoholic beverage giant Constellation Brands (NYSE: STZ).
Even so, Canopy has been going through a rough patch lately. Mounting quarterly losses, less-than-stellar recreational and medical marijuana sales, and a number of costly acquisitions ultimately culminated in the departure of longtime co-CEO Bruce Linton last week. While Linton initially stated that the decision was mutually agreed upon between him and the board of directors, he later admitted during a rather candid interview on CNBC's Squawk Box that he was forced out the door -- presumably at Constellation's behest. The company will reportedly begin searching for a new CEO immediately. And as part of this management churn, co-CEO Mark Zekulin stated that he also plans to step aside, once a replacement is found.
As Canopy begins the transition to a new management team, it's an opportune time to consider where this top pot company might end up in the next five years. So, without further ado, here's a look at where Canopy seems to be headed.
The next step
Now that Canopy is a large cap company, it's arguably time for the company to start acting like one and that means improving its bottom-line in a big way. In the most recent quarter, the pot titan posted a staggering operating net loss of 174.4 million CAD, which was well above Wall Street's consensus estimate for the three-month period. Therefore, the first order of business for Canopy's next CEO will almost certainly be to rein in expenses and put the company on a path toward sustained profitability.
As things stand now, Wall Street has the company losing money all the way out until fiscal year 2022 -- a trend that clearly isn't sitting well with its equity partner Constellation. Underscoring this point, HEXO and OrganiGram Holdings -- two much smaller Canadian pot cultivators and distributors -- are both on track to turn a profit as soon as next year. Investors can therefore probably bank on Canopy hiring a cost-conscious CEO as its next leader. In other words, Canopy's days of plowing huge amounts of capital into highly speculative deals -- such as the proposed buyout of Acreage Holdings that will only go through if the U.S. ends federal prohibition on marijuana -- are likely over.
Canopy's aggressive business development activities should, in turn, give way to a far more conservative approach to value creation -- especially since the company already has an extremely broad product portfolio and international footprint. As part of this process, Canopy's main task in the years ahead will be to successfully integrate these various parts -- brought in by its former management -- in order to prepare for the eventual legalization of marijuana in the U.S. and other key international markets.
The bottom line is that this abrupt leadership change should turn out to be a watershed moment for Canopy and its shareholders. Linton's tenure definitively transformed the company into the alpha dog in the cannabis space, but Constellation clearly wants Canopy to take the next step in its evolution. Constellation, after all, seems destined to buy the rest of Canopy within the next five years -- if not sooner.
Is this pot stock worth buying right now?
Canopy's shares haven't been a great investment over the last eight months, but this lull should turn out to be temporary. Constellation's management knows how to create shareholder value -- evinced by the company's shares appreciating by a monstrous 1,450% over the past 10 years -- and they seem to be taking a proactive stance to get Canopy back on track in what seems like a prelude to a buyout. That fact bodes well for Canopy's stock price in the years ahead, perhaps making now a great time to buy shares.
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