This year started as a happy year for investors in Canopy Growth (NYSE: CGC). The Canadian marijuana share popped at the beginning of January and increased by more than 90% at the end of April. And then the bottom fell out.
Canopy encountered problem after problem. Disappointing sales growth. Product returns. Founder and former CEO Bruce Linton has resigned. Shares have now fallen by more than 25% and are more than 60% lower than the highs set earlier this year.
But don't think the malaise from 2019 will start the new year. Here are three reasons why Canopy Growth is expected to return in 2020.
More cannabis stores
In Canopy Growth's fiscal 2020 fiscal year during the second quarter conference call, CEO Mark Zekulin did not hide his words about the problems the company is facing.
“Today's market opportunity is simply not in line with the possibilities,” he said, adding that “this is also due to the inability of the Ontario government to directly license stores - directly resulting in a halving of the market opportunity. opportunities within the expected market in Canada. ”
Certainly not all of the misery of Canopy Growth was due to the limited store infrastructure in Ontario. However, Zekulin did not exaggerate the problem. However, the good news is that there is a solution on the way.
Ontario has licensed 42 new cannabis stores in the first phase of addressing the problem. The province plans to issue about 20 new permits each month starting in March 2020. Canopy Growth hoped to see 40 new stores opening each month from January. While that won't be the case, the additional cannabis stores in Ontario should significantly increase sales of adult recreational marijuana use next year.
A growing Cannabis 2.0 market
Ontario's improving retail scenario comes at a good time. The Canadian “Cannabis 2.0” market for cannabis derivatives is still in its infancy and should really take off next year. The first cannabis derivatives could be shipped from December 16, although most new products won't hit shelves until January.
Canopy Growth plans to roll out its first cannabis derivatives products in early January. These will include cannabis chocolate and three cannabis-infused beverage products. The company expects to launch its vape products at the end of January 2020. Canopy also plans to launch other cannabis-infused drinks in January and February.
How big the Cannabis 2.0 market will be remains to be seen. However, Ernst & Young projects that by 2025, sales of cannabis extracts, edibles and inedible derivatives could reach nearly $ 6 billion in Canadian dollars. That's almost the same size as the entire Canadian cannabis market this year.
A new CEO
Canopy Growth announced David Klein earlier this month as the new CEO. Klein will replace the departing CEO Mark Zekulin on January 14. Can a new person at the helm really help Canopy to bounce back in 2020? Of course.
First, Canopy's stock took a leap following the news of the hiring of new CEO Klein. Excitement flooded Klein's background. He is currently CFO of Constellation Brands, Canopy's partner and largest shareholder.
Klein won't be able to fix all of Canopy's problems in a short amount of time. However, he will almost certainly bring the company a financial discipline it never had. It will come as no surprise if one of Klein's top priorities is to put Canopy Growth on a clear path to profitability. That alone should add value to the stock.
Which probably won't be a big catalyst for increase
Don't look to the company's strategy for America to serve as a major catalyst next year. Sure, Canopy recently launched its first hemp-derived CBD products in the United States. However, those products will only be available online on a new website, at least initially. This limited retail distribution channel is unlikely to generate huge sales.
What about the Canopy deal to acquire Acreage Holdings? The acquisition depends on changes to US federal marijuana laws. Although the federal legalization of marijuana has solid public support and some political support, the chance that legislation will pass through the US senate remains very small for the time being.
However, Canopy Growth should not need success in the US to still achieve large profits in 2020. An improving retail environment in Canada, a growing market for cannabis derivatives and a financially informed new leader should be more than enough to give investors a happy new year.
Also read more on Fool (AND).