5 Risks Cannabis Investors Need To Understand

Cannabis company Canopy Growth Corp CGC — and by default its investment partner Constellation Brands, Inc. STZ — are positioning themselves to be "all things to all people" in the cannabis market, according to Macquarie Research.

Canopy is also positioning itself to generate a first-mover advantage by building assets around the world.

Yet this "very expensive strategy" was called into question by the sell-side firm after consulting with an unnamed cannabis contact with multistate licenses and a retail footprint in the U.S.

In a Dec. 18 note, Macquarie's Caroline Levy maintained a Neutral rating on Constellation Brands with a price target lowered from $210 to $192.

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The Thesis

Canopy Growth's strategy of "spreading a wide net" across anything and everything cannabis-related should have Constellation Brands investors incrementally more cautious about its investment, Levy said in a note.

After consulting with an industry expert, it's clear all cannabis companies face five risks in both the U.S. and Canada, the analyst said:

1. The cannabis contact said it took five to six years to accumulate licenses in more than 10 states and will take several more before the FDA allows the substance to enter the market.
2. The Canadian market is not set up to favor branded products: any provinces limit licensed producers in their retail footprint, but controlling the point-of-sale is "central to profitability."
3. The cannabis product itself is inconsistent, and it can take an hour for some consumers to feel any impact, presenting a risk of overconsumption.
4. Companies operating in the U.S. face higher tax rates ,as the IRS allows for the deduction of cost of goods sold, but not selling and marketing expenses. This could impact profitability, especially in the early stages of development.
5. Branding will be a challenge, as consumers will prioritize convenience over brands. Medical patients will likely need to transact within state borders due to Rx regulations, making nationwide medical brands unlikely.

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