“I believe every gram produced in Canada for the next five years will be sold. So it’s who can produce the most grams.” That’s a quote from Chuck Rifici, one of the founders of what turned into – at least for a time – the largest cannabis company in the world. Flash forward a few years and just last month, Canadian Investment Bank Eight Capital gave that same company, Canopy Growth (TSX: WEED), a $0 price target. You heard that right, $0. The once industry leader in cannabis stocks, who hit an all time high share price of US$55 and a market cap over $20 billion, is starting to look like a zero. What’s the story? How did they become a market leader only to fizzle out? Why isn’t cannabis that lucrative of an industry in Canada? Let’s dive in. The beginnings of Canopy Growth Lets go back to early 2013, when a small company by the name of Tweed was formed, with the hope and dream of capitalizing off the back of the idea that Canada might legalize recreational cannabis. To start, Tweed acquired a 168,000-square-foot facility that in a previous life was a Hershey’s chocolate factory, and the lifeblood of the small town of Smith Falls, Ontario. Soon after, Tweed received its medical cannabis license. It was one of only 13 at the time, which allowed for the company to cultivate and sell cannabis in what would become known as the “Pot Capital of Canada.” This was just the beginning, though, with the company electing to go public in April 2014 to easily access capital for further expansion. Tweed managed to raise $30 million as part of this effort, while pinning down a $90 million valuation. The Tweed visitor center in Smith Falls, Ontario. Despite the outward facing success, internally, there were struggles. Co-founder and CEO Chuck Rifici, whom notably was the former CFO of the Liberal Party of Canada, was kicked from his role by August, and from the board the following month, with fellow co-founder Bruce Linton replacing Rifici at the helm. The internal turmoil hinted at the pressures of operating a startup in an emerging industry. With Linton at the helm, it signaled a new phase for the company. A few short months later the company acquired Bedrocan Canada, its biggest competitor in the market, in an all-stock deal valued at $61 million. It was the first of countless acquisitions which set the stage for the company to be renamed to Canopy Growth in September of 2015. Political change Concurrently, political change was brewing. The Liberal Party, led by Justin Trudeau, showed strong support for the legalization of marijuana. In September 2015, Trudeau declared that the Liberals were committed to legalizing marijuana to rectify a “failed system” and to eliminate the criminal element associated with the drug. Following Trudeau’s election, he affirmed that a Liberal government would immediately start working on a policy for the legalization and regulation of marijuana. This political backdrop set the stage for Tweed’s impending success. Investors, not wanting to let other people make money, took to the Canadian public markets looking for investment opportunities. And they found Tweed, who didn’t waste time capitalizing on the potential market expansion due to legalization. By November of 2016 Canopy became Canada’s first cannabis unicorn with a $1 billion valuation, positioning itself as having first mover advantage in a booming industry, while focusing on a growth at any cost model that saw them acquire countless peers.
Source: the deep dive