One of the biggest players in the cannabis space these days is Canopy Growth Corp. (CGC). With operations not only in Canada, but now throughout the US and elsewhere, the firm is truly one of the only multi-national players in its space. Though it, like many of its peers, still struggles to generate consistent profits and positive cash flows, the latest quarter revealed that management continues to show improvements. Add in the fact that the business still has plenty of financial wiggle room and that a Biden presidency could lead to the legalization of cannabis throughout the US as a whole, and the future for the business is starting to look up.
A necessary note
Unless otherwise stated, and even then only on a case-by-case basis, all references to $ or dollars refers to Canadian dollars, not US dollars.
The situation is improving
By pretty much every measure, the financial condition of Canopy Growth Corp. is looking better than it has perhaps ever. Consider, for instance, the business’ revenue for the second quarter of its 2021 fiscal year. According to management, this figure totaled $135.3 million in the latest quarter. This is 77% higher than the $76.6 million the firm generated the same quarter a year earlier. A discussion of this is warranted though. Some parts of the business fared incredibly well. Non-cannabis revenue, for instance, soared from $23.6 million to $43 million. Cannabis 2.0 products, which include things like infused chocolates, infused beverages, and vaping products, went from nothing to $8 million. Its S&B vaporizer products performed exceedingly well, with revenue rising no less than 100% year over year. Oils and softgels, meanwhile, grew from $3.4 million to $7 million.
The single largest source of growth, surprisingly, came from the company’s recreational cannabis products as a whole. Total revenue here skyrocketed 178% from $21.9 million to $60.9 million. This was, in part, driven by some of the aforementioned improvements, but the largest contributor was a 380% expansion associated with the company’s B2B operations. Specifically, the firm benefited from a change in its expected returns and from pricing adjustments to some of its products. This represented a change of $28.9 million year over year.
As followers of Canopy Growth Corp. know, the company is largely focused on its operations throughout Canada. This is because of its other US-based businesses. This includes BioSteel, for which the business has struck a deal with Constellation Brands (STZ) and other brands. BioSteel’s RTD (ready-to-drink) CBD-infused beverages will be ready for full US distribution. Earlier this year, Canopy caught some attention in the US with its announcement of a partnership with Martha Stewart for some CBD gummies, oils, and softgels that are to bear her name on them. In addition, the company’s Storz & Bickel vape business continues to see demand soar, and as a result, management expects to triple that subsidiary’s production capacity by next summer.
All of this is great to see, but there has been some mixed data to it all. Net income in the latest quarter, for instance, came in at -$32.06 million. This compares to an anomalous $258.92 million seen the same quarter last year. Operating cash flow in the first half of its 2021 fiscal year, however, came in stronger at -$280.30 million, compared to the -$372.09 million seen in the first half of its 2020 fiscal year. This was due in part to an improvement in the latest quarter from $213.80 million to $161.75 million. Due to lower capex, free cash flow also improved, moving from -$442.12 million in the second quarter of 2020 to $190.40 million today. The only other relevant cash flow metric I decided to look at had similar results. That was EBITDA. In the latest quarter, this figure totaled -$85.66 million. This compares favorably to the -$150.38 million seen in the second quarter of the business’ 2020 fiscal year.
The fact that management cannot even report neutral, let alone positive, EBITDA - a metric that can be manipulated to say just about whatever management wants it to - may be very disconcerting to some investors. Certainly, the fact that the figure is consistently negative is a problem, and at some point, it must turn positive if management intends for Canopy to survive and thrive in the long run. Fortunately, at the moment, the company does have three things going for it. The first of these, obviously, is the fact that with the exception of net income, all of its other cash flow / profitability metrics are showing continued year-over-year improvement. This means some progress is being made on that front.
The second is that management has already identified further costs that it wants to remove from the business. After a thorough review of the firm, management identified between $150 million and $200 million worth of cost savings that it is beginning to work on. The third thing the firm has going for it is a significant amount of cash, cash equivalents, and short-term investments. In total, Canopy ended the latest quarter with these totaling out to $1.74 billion. This compares to about $2 billion at the end of its 2020 fiscal year two quarters earlier. Using the latest quarter’s free cash flow figures, this takes us to a little over nine quarters' worth before the business were to run out of cash entirely. Ideally, management can reach cash flow breakeven long before that, but it does illustrate how much wiggle room the firm has before the situation would become dire.
Last, but not least, is the impact of a Biden Administration on the firm. Nobody knows what the future will hold for the industry, but federal legalization could be a boon for the space. One source estimates that continued increased legalization will lead to the US opportunity growing to $65 billion by 2027. Federal legalization could actually make this opportunity become realized quicker and make it even more significant in size.
Takeaway
Based on the data provided, it seems quite clear that things at the moment are improving nicely for Canopy Growth Corp. Yes, the business does have some issues to contend with, particularly surrounding its breakeven point, but management appears to be hard at work on that front. Moving forward, there’s a lot to be excited about, but the key is to see if management can hit that breakeven point comfortably before it runs out of cash and other options.
https://seekingalpha.com/article/4387928-canopy-growth-corp-showing-robust-signs-of-improvement