Canopy Growth: Sell Before Legalization On October 17th

It’s time to have a serious talk about weed.

Investors have made impressive returns with pot stocks, particularly Canopy Growth (CGC), Tilray (TLRY), Cronos Group (CRON). But the growth story has reached its climax (for now at least), and the fun is about to end.


What’s happening now reminds me of what happened with Bitcoin in late 2017. People seemed most optimistic when the price peaked around $20,000. Everyone was talking about the potential for Bitcoin and blockchain technology. Nobody was really talking about the actual value of the technology today.

Pot stock investors are overly optimistic about the upcoming legalization of recreational marijuana in Canada (Oct. 17th). And this optimism is reflected in the market price of pot stocks like CGC. To justify today’s prices, investors must believe there will be massive demand for recreational weed once it’s legal. If they’re right, pot stocks look fairly valued. But if they turn out to be wrong, prices could fall dramatically.

I’ll focus on CGC for this article, which is widely regarded as the strongest company in the industry. I’ll start with a review of the growth story we’re being sold, then provide 3 reasons why I think prices will fall.

The $4.2B-$8.7B market hidden in plain sight

Predictions for Canadian marijuana sales vary. Canada’s Parliamentary Budget Officer (PBO) forecast sales between CA$4.2B and $6.2B; Deloitte thinks it will be in the range of CA$4.9B to $8.7B.

But what’s most important is this: Constellation Brands (STZ) CEO Sands pointed out that CGC has won 35% of the supply contracts for recreational cannabis in Canada, and predicts sales in the country will reach US$5-7B, giving CGC first-year sales of about $2B (assuming a 1/3 share of the market).

We can take the company’s valuation and see how it matches up with these forecasts.

CGC had a market cap of $12.7B and price to sales ratio of about 192 as of October 15th. Now we have to make some assumptions. We’ll stick with generous assumptions to paint as nice a picture as possible.

Let’s say, once marijuana is legalized, CGC is able to achieve a 32% operating margin (the same as STZ). That would give CGC an annual profit of $640M, and a Forward P/E of 19.8, which is in the same ballpark as the Forward P/E ratios of a basket of companies that CGC aspires to be like (see table below), including British American Tobacco (NYSEMKT:BTI), Anheuser-Busch InBev (NYSE:BUD), Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), and of course Constellation Brands.

Our aspirational P/E is quite a bit higher than BTI’s, and in line with beverage brands like KO, PEP, and CGC owner STZ.

This seems like a reasonable comparison because CGC aims to be more than a commodity producer – they want to own a diverse portfolio of marijuana brands. Today’s valuation seems to assume CGC will successfully market its suite of cannabis-infused edibles and beverages.

Is this realistic?

Probably not.

The forecasts above for the size of the recreational marijuana market are based on estimated black market sales, which are by no means guaranteed to transfer completely to legal sales. People will continue to buy from existing channels (especially if it’s cheaper) and some will just grow weed themselves (which is not very hard to do).

Also, to get first-year revenues of $2B, you have to assume CGC will execute flawlessly in the coming year and the government rollout plans will go smoothly. Today, on the brink of legalization, there are hardly any retail cannabis stores open. There’s one in B.C. and zero in Ontario, Canada’s most populated province. Ontarians will have to shop for weed online.

Basically, everything has to go right to justify the current valuation.

But if you ask CEO of Canopy Growth, that’s exactly what will happen. Everyone in Canada will want to start smoking weed once it’s legal:

Mr. Linton likes to compare his company to tech leaders like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). The comparison is a little bit silly. CGC and its competitors grow marijuana (a plant) and sell marijuana products (oils, tincture, and soon candy, snacks, drinks, etc.). It’s not a tech company. Just because they give employees stock options and have cool perks at work doesn’t make them like Amazon or Google.

This is just an example of how this industry is overhyped. Sure, the global market could turn out to be huge (some say $200B). But it’s not there yet.

Aside from the obvious regulatory uncertainty (including the fact that marijuana remains illegal in most markets), here are three reasons why pot stocks like CGC are overvalued.

1) Demand won’t exceed supply forever

Canadian cannabis producers seem to be sitting pretty, with demand for medical marijuana outstripping supply. This has led to strong margins for medical marijuana sales.

But with all the investment being shoveled into increasing production, this supply shortage can’t last forever. As weed sales become legal in more and more places, commoditization will take hold, competition will increase, and prices and margins will go down. The companies that are able to establish strong brands will succeed. Others will struggle.

CGC looks well-positioned, comparatively, but there are a lot of uncertainties involved. They’ll face stiff competition from beverage and maybe even tobacco companies that have a lot more experience building enduring brands.

2) For now, CGC and its competitors are in the commodity business

Marijuana is a commodity. The real profits, if and when they materialize, will come from companies that are able to establish strong brands. Whether CGC will be able to accomplish this remains to be seen. Granted, they’re taking steps towards this goal.

Of course, many investors see this as a near certainty in light of STZ’s recent $4B investment in CGC. But don’t get too excited about cannabis drinks and snacks just yet, because the company will have to wait at least another year to gain regulatory approval to sell these kinds of products.

Cannabis sales become legal on October 17th, but only in the form of dried cannabis, oil, and seeds. No edibles or concentrates (what you need to make a drink or to vape) will be allowed.

Health Canada specifically left these types of products out, saying they needed more time “for the development of specific regulations to address the unique risks posed by these product classes.” They’re reviewing things like quality control, packaging and labeling rules, allowable THC levels and portion sizes (most people know how hard it is to know when you’ve had “enough” when you’re eating cannabis-laced food since it takes a while to kick in).

Also, consider that there will be strict limitations on packaging in order to help prevent underage users from eating something that looks like candy. It might be hard to establish a brand – potentially much harder than it was for cigarette brands back in the day. We live in a much different world.

Health Canada expects to be ready to approve edibles and concentrates within one year of implementing the Cannabis Act (Bill C-45). I hope investors are patient.

So legalization after October 17th, I think, is going to be somewhat of a disappointment for investors who are expecting pot stocks to spike up even more. The real big day will be when edibles become legal sometime in 2019 or later.

3) Weed investors might be particularly prone to optimistic buying

The hype surrounding pot stocks seems to have attracted many new people to stock market investing. I’ve heard stories of people gaining 400% or more in a few months by putting all their savings into pot stocks. The most extreme story I heard is about a guy who placed a lien on his house to invest as much as possible. This person allegedly now owns more than $2M worth of pot stocks and is holding strong.

These people have incredibly high appetites for risk but not much experience. They believe in the growth story so strongly, they’re willing to put everything on the line. Right now these investors look like geniuses. But the really smart move might be to take some profits off the table before legalization.


Investors are understandably excited by potential deals and acquisitions on the horizon and recently inked deals like STZ’s $4B investment.

If these major beverage companies (and possible tobacco companies) are willing to invest billions into cannabis companies, shouldn’t individual investors also be willing to invest? Not necessarily.

As individual investors, we can choose to invest or not invest in any industry. STZ executives probably felt obligated to make a move and invest in cannabis because they A) are dealing with falling wine and spirits revenues, and B) are afraid to miss the opportunity to get in on the next big thing in the beverage industry. They want to be first to market. That’s why they’re willing to pay such a high price (a 50% premium at the time) to get their foot in the door.

But we don’t face such restrictions or competitive pressures. So we should avoid the temptation to buy pot stocks at this time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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TomTom reports better-than-expected third-quarter core earnings

AMSTERDAM (Reuters) – TomTom (TOM2.AS), the Dutch maker of digital mapping software, on Tuesday reported better-than-expected third-quarter core earnings of 62.4 million euros ($72.2 million), compared with 35.5 million euros a year earlier.

FILE PHOTO: TomTom navigation are seen in front of TomTom displayed logo in this illustration taken July 28, 2017. REUTERS/Dado Ruvic

Company-compiled consensus had seen earnings for the quarter before interest, taxes, depreciation and amortization (EBITDA) at 41 million euros.

The company raised its full-year revenue outlook to 850 million euros from 825 million euros, but said a contract announced in 2016 to provide location and navigation services to Volvo had been ended.

Reporting by Toby Sterling; Editing by Subhranshu Sahu

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Will the Mighty Tech Giants Fall and the Upstarts Eat Their Lunch?

Legacy companies like Cisco and Microsoft have dramatically shaped our work lives. Those old enough to remember the electric typewriter will recall the joy of time saved when the word processor graced our desks. When the mighty Cisco introduced video allowing us to see colleagues at another location, we realized how awkward it is to include virtual colleagues in the meeting, a learning curve that helped bring teams together in a new way. Bottom line is this: Cisco and Microsoft gave the workplace the gift we all want more of–time. Until now.

Today, executives are looking for solutions that facilitate rapid progress and giving employees the tools to collaborate, create, and execute quickly. It used to be that Cisco’s Webex conferencing solution was the default standard for group collaboration. The reality is an audio and video solution cannot meet the needs of today’s workers, let alone the upcoming generation’s expectations.

If your company wants to innovate and attract top talent, it is time to carefully evaluate the technology you will need to win in the marketplace. Central to this task is looking ahead and not in your rearview mirror.

The Forces Shaping How We Work

The World Economic Forum identified seven disruptors changing the way you work. “Technology will be everywhere” is one one of the seven the WEF identified. Mix this trend with how Millennials and Gen Z have influenced the way we rely on our devices to communicate with one another.

In a recent Adobe study on the views of technology and work, over 80 percent of the global workforce says technology helps them be more efficient. At the same time, over 70-80 percent look to technology to help them collaborate with their peers.

In a different study by the World Economic Forum, 44 percent of respondents placed work flexibility as their top perk. In a 2017 report from Deloitte, the consulting giant put culture at the top of the list that demands executive attention.

In short, the future of the workplace is driven by technology. To realize the capital investment in new information technology, it requires a culture that helps employees work with ease.

It’s the last two sentences above that should have companies like Cisco and Microsoft worried.

Eating the Legacy Companies’ Lunch

Talking to a phone does not help people connect and collaborate. “A phone call is the best way to collaborate,” said no one ever. Today’s employees are using Slack to communicate across teams. Work is done using Adobe’s suite of creative tools (think Photoshop, InDesign, Audition) and its favored PDF software. 

Though the legacy companies offer video to replace the dreaded phone, it becomes one more app to use. The value of video meeting solutions like Zoom or RingCentral is they are affordable, offer a consistent experience, and are easy to implement across the organization.

This is where a company like Bluescape makes the ecosystem of apps and tools a seamless experience. With Bluescape, you can bring together in one system Slack, Adobe, Zoom, Microsoft documents, Dropbox, Google Apps tools, and more.

So, instead of shuffling through a bunch of screens or struggling with wonky cameras, imagine a collaboration command center. Perhaps this flexibility is why Fortune 50 companies and movie makers are now using Bluescape and Slack. Alternatively, perhaps this is why the two companies are teaming up to support the dynamic needs of today’s modern workplace?

Yeah, We’ve Got That

A significant limitation to Microsoft and Cisco’s collaboration technology is it limits companies to only their solution. If employees prefer Zoom over Skype, they cannot use it. It doesn’t integrate seamlessly into the legacy companies’ products. Slack? Nope.

The future of collaboration is one-part technology and one-part human dynamics. When a preferred tool can better facilitate progress, but it falls outside a complete solution, user adoption suffers. 

Replace the boneyard of apps no one uses with a philosophy of “yeah, we’ve got that app, too.” A secure, open architecture solution eases IT’s security concerns and offers your employees access to the tools that fit the way they work best.

The Collaboration of Collaboration Solutions

Yes, collaboration is more than technology. It is also humans working together in a manner that adds to the employee experience.

Rich Sheridan, CEO of Menlo Innovations, a software development company, says technology needs to do what it promises. He believes this brings people joy. There is something to his philosophy.

Companies like Bluescape, Slack, and Adobe are replacing the frustrations and disappointments that come with technology that does not deliver a predictable, joyful experience for your employees.

I’ll leave you with this thought. The one-to-one nature of a Webex meeting or listening passively to a PowerPoint presentation is passé and not collaboration. The future of work is centered on collaborative work environments. This includes offering flexibility and choice in the tools employees can use to collaborate and connect with one another.

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Here's How to Prevent Your Company from Exploding into a PR Fire

The key, of course, is prevention. Companies need a robust system that keeps small problems just that. There must be instructions with clear, concrete steps to prevent smoke from becoming fire. Here are tips on how to help prevent your company from getting embroiled in a crisis:

1. Analyze Your Risks

2. Get Every Level Involved

I’m a believer that every employee should be CEO-ready. Similarly, every employee should be crisis-ready, too. Seek input from every level of your company, from the lowest-level employee up to Chairman of the Board. Have them identify the potential risks they see. Also have them consider how they would fix problems identified by others. Sometimes the solution is simple, but you’d never know it because of a lack of communication across teams. Then, take the opportunity to train every employee on your crisis management plan, including how to identify potential crises before they get to that stage.

3. Monitor and Vet Social Media

Social media is a blessing and a curse to business. It’s a wonderful platform to deepen ties with current customers, interact with new consumers, and develop fans of your brand. Businesses need social media, but it comes with risk. One simple tweet can start a firestorm of controversy. If your company is active on social media, you need someone constantly monitoring your feed. If a customer reaches out with a problem, get on it immediately. Importantly, you also need a variety of people to vet what you plan to publish on social media. Many a well-intentioned tweet has opened the door to unexpected criticism.

4. Have Fire Extinguishers at the Ready

No matter the planning and prevention, no business is perfect. There will be small problems that grow into big problems, and you need a failsafe in place to stop the bleeding. This includes a clear path for employees to escalate information when they see a crisis brewing. If the leader is on an extended absence, you need to know who will assume the leader’s crisis management responsibilities. This also requires regular training of all employees on your plan.

5. Ownership

It’s inevitable that bad things will happen. How you deal with them will define your company in the social consciousness. If the cover-up is always worse than the crime, then the denial of a crisis is always worse than the underlying problem. If you messed up, or sometimes even if it wasn’t your fault, own it. Transparency and honesty will buy you credibility with consumers, even if the rest of your response isn’t perfect.

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