Canopy Growth Takes a Big Step in Advancing Its Strategy for the U.S. Marijuana Market

Canopy Growth (CGC -2.95%) has finally done it. After five years, it has found a way to close on its pending acquisition of Acreage Holdings, one of the top multi-state operators (MSOs) in the U.S. cannabis market. But a big caveat comes with the announcement — it won’t actually be able to consolidate Acreage’s results due to the federal ban on pot.

So what does this really mean for Canopy Growth investors? Here’s a look at the key takeaways for investors, and what actually matters as a result of these developments.

Consolidating its U.S.-based assets will help it work on its U.S. strategy, indirectly

Canopy Growth created Canopy USA, a special purpose vehicle, with the aim of holding its U.S.-based assets, because its core business can’t do so — not without jeopardizing its position on the Nasdaq exchange. It’s a complex setup that means the entities are technically separate and Canopy Growth has a non-controlling interest in the business. If and when federal legalization takes place, the two entities will likely merge, but until that happens, their businesses will be separate.

By acquiring Acreage Holdings, Jetty Extracts, Wana Brands, and other U.S. cannabis assets, Canopy USA is able to work on consolidating those entities and focusing on efficiencies and synergies as businesses normally would after acquisitions.

It’s a whole lot of maneuvering for not really anything substantive in the end. Canopy Growth, could, after all, advise these businesses on what they should do without really having control. And with Canopy USA, it still doesn’t really have control, either. This is why this structure really isn’t all that enticing and why investors shouldn’t be reading too much into these developments.

Canopy Growth’s financials remain troubling

What I’d argue is more important for Canopy Growth to get ready for the U.S. market (assuming it eventually becomes legal) is to strengthen its financials. With a better balance sheet, positive cash flow, and a more sustainable business, that will position it for expansion much better than these complex structures and pending acquisitions will. There will be plenty of opportunities for expansion when the time comes, but if the company’s financials aren’t in strong shape, it might all be for naught.

In its most recent fiscal year, which ended on March 31, the cannabis company still incurred a massive net loss totaling 675.8 million Canadian dollars. With significantly less in impairment charges, it was able to improve upon its CA$3.3 billion loss in the previous fiscal year. But the company has also become leaner by getting rid of assets, including sports nutrition business BioSteel, which it said was a drain on its cash.

While its cash burn improved, Canopy Growth still used up CA$282 million from its day-to-day operating activities this past year (versus CA$557.5 million in the previous fiscal year). Overall, the company still has a long way to go in being ready, from a financial point of view, to expand effectively and efficiently into the U.S. — or any other market, for that matter.

There are better options in the U.S. cannabis market

Canopy Growth technically did advance its U.S. strategy by exercising its option to buy Acreage, which paves the way for Canopy USA to acquire it. But in essence, the Canadian-based company is still in the same position as it was before — no U.S. cannabis businesses will contribute to its financials. And with financials that need a lot of work, that’s ultimately what matters the most for investors.

Although the company may want to position itself as being the best way for investors to gain exposure to the U.S. market in the future, investors can simply invest in MSOs. MSOs are the ones that will actually benefit financially if the Biden Administration reschedules cannabis. Canopy Growth’s stock may benefit from bullishness in the cannabis industry as a whole, but that’s about it.

Canopy Growth is a highly risky stock, and my concern as an investor would be that the company is diverting too much of its resources and attention to a market that just isn’t available to it. Until that changes, investors are better off pursuing other cannabis stocks.