There were bizarre developments at publicly-traded cannabis company Canopy Growth Corporation on Wednesday.
Canopy Growth announced that co-CEO and founder Bruce Linton would “step down as co-CEO.” Yet Bruce Linton called into CNBC later that day and told the business news network:
“I think stepping down might not be the right phrase. I was terminated.”
Canopy Growth further announced that Mark Zekulin agreed to take sole ownership of the CEO position and find a new leader but then said he would step down himself after that position was filled.
Marijuana stocks like Canopy Growth hit it big last year in the stock market, and many continue to hold onto their gains.
Canopy Growth stock is up 35 percent in the past year and is up almost seven-fold in the past three years, rising to a market cap of over $13 billion. This came despite the fact that Canopy Growth had virtually nothing of tangible value until last year. The stock could go even higher.
So why was Bruce Linton fired?
The most likely explanation is that Constellation Brands, the global beverage powerhouse that invested $4 billion in Canopy Growth, wasn’t pleased with the direction the company was taking.
A $4 billion investment is more than enough for a company leader to get anything done, yet Constellation Brands probably didn’t like the C$323 million loss last quarter, which impacted its own earnings by about 20 cents per share.
Bruce Linton seems to be more interested in producing cannabis and building out infrastructure to support a long-term growth trajectory, whereas Constellation wants profits now.
That’s understandable, particularly because this is a market that will rapidly become commoditized. First-mover advantage in a commoditized market makes a huge difference, especially when a $4 billion investment is at stake.
Once commoditization takes over, the only distinguishing features will be quality and price. Differences in quality will rapidly evaporate as everyone’s processes for growing cannabis are figured out, and price wars will break out, squeezing margins.
There’s another problem which Constellation doesn’t seem to be aware of. Canada has approved recreational cannabis but slowed the application process down. The U.S. and other countries are headed in that direction. It’s far too easy right now to flood the market with supply.
That will push prices down and also create potential waste.
The market simply isn’t ready to be a mass market, and Constellation seems to want the market to be more ready than it is.
Cowen analyst Vivien Azar seems to echo Constellation’s concerns, saying:
“The magnitude of losses for [Canopy] has expanded far more than we had expected, and while we commend Linton for his vision in establishing the world’s leading cannabis company, we believe new leadership will be a welcome change.”
“It went from a board of all independents to a board which is really four Constellation folks, and three that are not. The new governance group created some interesting dynamics … but nobody else [other than Constellation] was writing the first check and then moved boldly with the second check, and that’s what moved them into the driver’s seat”.
That’s what happens when a company accepts big money.