Canopy Growth's Disappointing Q4??? Canopy Growth's Disappointing Q4 May Be Masking Its True Profit Potential
https://m.investing.com/analysis/canopy-growth-200434340 If investors were hoping for Canopy Growth (NYSE:), (TSX:) to reverse the downward trend in the cannabis sector of late, they were disappointed late last week. But perhaps they should consider tempering their frustration.
Shares of the largest marijuana company in the world dropped more than 8% last Friday after it unveiled its latest earnings after the closing bell on Thursday, June 20. The financials for the three-month period that ended March 31 showed ballooning losses that were more than four times what analysts expected.
Although the market reaction was clear, and a signal that investors are keen to find a path toward profitability, the company sent a strong message of its own: it's focused on its strategic positioning in multiple segments of the cannabis sector and the long-term prospects of these opportunities. Investors who are in it for the long haul should take comfort in this view, as the outlook for profit, when seen through this lens, is discernibly more optimistic, albeit still some way in the distance.
Canopy stock dropped to US$40.20 on the New York Stock Exchange and C$53.28 on the Toronto Stock Exchange last Friday. Put in context, this dip is just that, for as of this morning Canopy is still up 23.65% in the U.S. and up 22.68% on the Toronto Stock Exchange compared with a year ago. And the stock also gained slightly yesterday.
If nothing else, Canopy’s latest results made it clear: cannabis truly is a new and different sector. The Canadian-based company last week reported net revenue of C$94.1 million ($71.41 million USD), a 312-percent increase from the C$22.8 million ($17.3 million USD) in the corresponding three-month period in the previous year. The revenue tally was even higher than that predicted by analysts.
First, The Bad News
But the disappointing news came in the net loss attributed to shareholders, which shot up to C$335.6 million ($254.7 million USD), and translated into a 98-cent-per-share loss for the quarter, compared with a 31-cent-per-share loss in the previous quarter.
Operating expenses for the quarter were pegged at C$242.9 million ($184.3 million USD), up 332% from the corresponding period in 2018. For the year, operating expenses totaled C$666 million ($505.4 million USD), a 347% jump from the previous year.
Then, The Good News
With such large percentage spikes in expenses, it is perhaps understandable that the market seemingly overlooked the good news that was tucked away in two key metrics. First, net revenues were up 313% for the quarter and 191% for the year. Breaking that down, recreational cannabis revenues were C$68.9 million ($52.3 million USD) for the quarter and C$140.5 million ($106.6 million USD) for the year. But this good news was not completely one-sided. Sales of medical cannabis were down 39%: sales for the quarter came in at C$11.6 million ($8.8 million USD), down from C$19.5 million ($14.8 million USD) in the same period in 2018.
The second piece of good news was nestling in the company’s cash reserves. Canopy listed its cash, cash equivalents and marketable securities at $4.515 billion ($3.43 billion USD), up 1,298%. This hefty war chest is fueling optimism for growth as the expected lucrative edible products are scheduled to hit the market at the end of this year.
Mounting Momentum
Putting these numbers alongside the other positive developments currently underway — Canopy’s partnership with Constellation Brands (NYSE:), the maker of Corona beer, meaning the cannabis cultivator is poised to enter the beverage market; the recent purchase of UK-based skin-care company This Works, a key partner in the international wellness space; and the confirmation last week that shareholders have approved the proposed of U.S. marijuana company Acreage Holdings Inc., providing a large accelerated entry into the U.S. marijuana market the moment the U.S. legalizes weed at the federal level — and the momentum that is building is difficult to ignore.
Indeed, Canopy deals just keep coming. Yesterday, the company announced it received a new license for a major outdoor growing operation in northern Saskatchewan. Secured fields that span 160 acres will add to the firm’s cultivation capacity at a lower cost than indoor facilities. Canopy also announced yesterday an increase to its hemp cultivation capacity with about 1,000 more acres being added to its existing 4,000 acres. The plan is to scale production of cannabinoids to supply beverage, edibles and vaping products.
Canopy investors may not have liked all the numbers last week, as the figures drive home the message that profitability is not a simple function of legalization. But legalization was not the end game. There is a lot more to come in this sector, including edibles and infused drinks poised to hit store shelves in Canada at the the of 2019.
Written By:Investing.com