More Bad News for Canopy Growth Corp (TSX:WEED): License Restrictions

A bad earnings result isn’t the only reason investors should stay away from Canopy Growth Corp (TSX:WEED)(NYSE:CGC) .

| More on:
You Should Know This

Image source: Getty Images

Canopy Growth Corp (TSX:WEED)(NYSE:CGC) had a bad week last week. Not only did the company miss big on its latest earnings report, but its home province of Ontario released more information surrounding how the retail market will be managed, and it’s also not good for Canopy Growth.

Previously, we had learned that a producer would be limited to one retail location, but the big question was always how related companies would be defined and treated, which has now been clarified.

Under the Cannabis License Act in Ontario, if producers own more than 9.9% of a company’s voting rights, then the company will be considered to be an affiliate and will be unable to get a license. Affiliates and growers will share one retail license.

Why this is a big blow to producers

Canopy Growth recently acquired Hiku Brands, which owns Tokyo Smoke, a popular retailer that the company was hoping would help develop its stores. Canopy Growth had high hopes for opening many stores, particularly in Ontario, and under these rules that simply isn’t going to happen and that’s going to have a big impact on its prospects for growth.

While it doesn’t prevent Canopy Growth’s products from making its way into retail, it does prevents the grower from having much of an influence into what a retail store looks like and the ability to affect branding.

Marketing is very restrictive in the cannabis industry, but one way that companies can create some sort of a brand loyalty is through the in-store experience.

Experience is a big part of consuming cannabis, and it’s what companies were looking to sell consumers on. Without that component, however, it’s taking away a big advantage that a company like Canopy Growth thought it would have.

It also makes the issue of gaining significant market share that much more difficult. More control over retail would have meant that Canopy Growth could have given its products more of a spotlight and preference for consumers. With limited ownership in retail, a grower won’t have much influence in ensuring that their products have prime shelf space.

Smaller cannabis producers will effectively be given more of an opportunity to compete against the big guys, which will ensure that consumers win in the end, as it’ll be price and quality that will distinguish which products get featured in a store, rather than who owns it.

Bottom line

Canopy Growth’s prospects don’t look as bright as they did before this news, and it might be harder than ever to justify investing in the stock.

It’s been trading at expensive multiples to sales, and with the company continuing to struggle to turn a profit from operations, there’s a lot of work that needs to be done before the stock can be considered a good investment.

The stock could be headed further down in price and interested investors might want to wait out more of a decline before deciding to buy.

 

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Investing

Target. Stand out from the crowd
Investing

2 Canadian Stocks I’m Buying Lots of This Year

I’m looking to snatch up exciting Canadian stocks like VieMed Healthcare Inc. (TSX:VMD) throughout 2023.

Read more »

grow money, wealth build
Dividend Stocks

Got $3,000? 3 TSX Growth Stocks to Buy in January 2023

Top TSX growth stocks that look appealing for 2023.

Read more »

woman data analyze
Dividend Stocks

Need Passive Income? Turn $15,000 Into $851 Annually

This passive-income stock is already climbing higher, up 16% in the last three months! Yet it's still valuable, so you…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 3 Reliable Canadian Dividend Stocks to Buy Now for Passive Income

Top TSX dividend stocks now appear oversold.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Investing

2 TSX Stocks Safer for Investing in a Recession

These consumer companies will likely beat the broader market averages amid a recession. These stocks offer stability, income, and consistent…

Read more »

Dividend Stocks

For $100 in Passive Income Each Month, Buy 1,500 Shares of This REIT

REITs such as Northwest Healthcare can enable investors create a passive-income stream as well as benefit from capital gains.

Read more »

A colourful firework display
Dividend Stocks

2 Canadian Growth Stocks (With Dividends) to Start 2023 With a Bang

Here are two of the best dividend-paying Canadian growth stocks you can invest in at the start of 2023 and…

Read more »

sale discount best price
Dividend Stocks

4 Insanely Cheap Canadian Stocks to Buy for Passive Income

The recent bear market has created some incredible bargains, especially for those looking for passive income. Here are four cheap…

Read more »