February 10, 2021
Canopy Growth stock surged Tuesday after CEO David Klein said on an earnings call that momentum toward legalization in the U.S. could enable Canadian pot producer Canopy Growth to enter the cannabis market there as early as 2021.
"It's past time that cannabis was legalized in the U.S. We're quite encouraged by Senators Booker, Wyden, and Schumer beginning to talk about making cannabis part of their overall criminal justice reform work that they would prioritize during this Senate," Klein told Cheddar.
Canopy stock hit a 52-week high Tuesday and closed up almost 12 percent. Shares of the Canadian cannabis producer have surged about 150 percent year-over-year.
Much of Klein's confidence stems from a joint announcement by Senate Majority Leader Chuck Schumer (D-N.Y.), Sen. Cory Booker (D-N.J.), and Sen. Ron Wyden (D-Ore.) early in February that pledged "comprehensive cannabis reform legislation in the 117th Congress." The plan was shy on details, only disclosing that it would prioritize restorative justice and public health, and would establish "responsible taxes and regulations." Many, including Klein, have interpreted the announcement as a teaser for legislation that would put an end to federal prohibition altogether — and Canopy Growth has consistently maintained it only needs federal permissibility to launch its U.S. plans.
It isn't just the coming legislation that has Klein optimistic. He's also eyeing the type of state-level momentum that resulted in voters from five states passing six cannabis-related legalization initiatives during the November election, and that has lawmakers in New York state making aggressive moves to bring in extra tax revenue from legalized cannabis amid the coronavirus pandemic. Plus, Gallup polling shows a record number of U.S. adults — some 68 percent — support cannabis legalization.
"A lot of momentum [is] building for cannabis legislation to make its way through the process this year," Klein said.
In the meantime, Canopy Growth is not twiddling it's thumbs. Canopy Growth has licensed brands to Acreage Holdings in order to introduce its products to U.S. consumers in advance of federal legalization. Canopy has an agreement to acquire a majority stake in Acreage once cannabis is federally permissible in the U.S. It also struck a similar deal with TerrAscend.
Canopy Growth also owns a number of consumer packaged goods and CBD brands like vape accessory company Storz & Bickel, sports drink maker BioSteel, and skincare company This Works and recently launched CBD products with lifestyle maven Martha Stewart. Klein said Stewart's products are helping to broaden Canopy's consumer base to first-time CBD users.
"Our U.S. CBD business is gaining momentum on the back of highly successful Martha Stewart CBD product launches," Klein said during a call with analysts.
"Our consumer research shows that one-third of Martha gummy purchases were first time CBD consumers, indicating that we are already achieving our ambition with Martha to bring new consumers into the category," he added.
Even if the U.S. doesn't pass full-on legalization this calendar year, Canopy has the discretion to move forward with the Acreage acquisition. Klein said the company has been working with lawyers, its partners at banks and exchanges, and even its investors at Constellation Brands to proceed carefully and lawfully. Still, Klein told an analyst Tuesday he remains bullish on Canopy's ability to step into the U.S. cannabis "at the right time."
Canopy's third quarter earnings were a mixed bag. The company reported a record revenue of $121 million (C$153 million), but posted a wide net loss of $654 million (C$829 million). Canopy Growth CFO Mike Lee said most of the losses were noncash. Roughly $301 million (C$382 million) of it was related to charges accrued by the closure of several cultivation facilities, announced in December. Lee also said key drivers of Canopy's roughly $194 million (C$246 million) adjusted EBITDA losses year-to-date were research and development investments, the build-out of U.S. infrastructure, and disappointing revenue in the Candian market.
In spite of those losses and a challenging year of layoffs and restructuring Canopy has undergone under Klein's leadership, executives say profitability is on the horizon. Lee said that Canopy's ongoing cost-cutting program will help it achieve positive adjusted EBITDA in the second half of 2022.
"We believe the foundation is in place to accelerate our top and bottom line growth and achieve profitability during the second half of next fiscal [year]," Lee said.