Our last look at optionality at Canopy Growth Corporation was back in February. Since we’ve got a couple more data points, let’s revisit them and see if there is anything notable going on:
And yep – not much at all. Boring really. SBC jumped a couple of quarters ago (CEO Klein’s $45MM payday), but it looks to be under control since. At least there’s that.
The drop in overall optionality stems from share prices falling below $20CAD back in March. Since then, share price has rebounded to ~=$30 levels, and a strong correlation between the optionality and share price provides a useful backtest of my model. The correlation coefficient is ok (.74), but the derivation of the slope of that line is what I’m as much interested in. Linear functions are easy enough – but optionality is non-linear by nature (hey, warrants and options aren’t known as ‘derivatives’ for nothing. Their value is derived through another asset <a share price in this case>, which, might prompt some of you to recall integral calculus from school and plotting functions).
When $STZ repriced their options last summer, it changed where the function intersects the x-axis. Best way to look at it is a long call option. That reprice reduced the initial cost of the option by some $1.5B, and reduced the price at which the payoff line becomes positive.
In option terms, $STZ reduced the premium they ‘paid’ and then changed the strike price. Nice deal if you can get it.
I include this not to glaze your eyes over (we’ve covered $STZ’s moves in depth) but to show you how big finance looks at assets and valuations. ‘Financial Engineering’ is very much a thing, and with share price volatility moving those valuations around, finance uses math to predict changes in asset value given a specific share price.
For people that use DCF in valuation will be familiar with present value calculations and capital budgeting (GoBlue’s entire being is centred around deriving future cash flow btw). Folks like myself use cost of capital to do the same thing.
Anyways, $WEED’s gonna be boring unless share price heads north to $40 again, optionality will blow out, and $STZ will have a payday. If share price declines, they’ll reprice. If it stays the same, then, total cost was known (there will be internal numbers driving decisions for the future right now that are based upon that estimate). All I know is that Big Daddy’s got this one by the neck. Whether they can make the thing profitable….that’s an unknown to me.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $STZ nor $WEED
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