Canopy Growth Fiscal Q1: More Short-Term Pain For Shareholders

Shareholders of Canopy Growth Corp (US:CGC / CAN:WEED) who thought that the termination of co-CEO Bruce Linton would magically boost either topline or bottom-line numbers were disappointed today. The company reported its Q1 2020 earnings after market close.

There was a slight improvement in Adjusted EBITDA (CAD$5+ million versus Q4 2019). There was a strong increase in the sales of dried cannabis for Canada’s recreational market (up 94% from Q4).

In its cultivation operations, Canopy reported a 183% increase over Q4 2019. The company reported growth in international cannabis revenues and substantial growth in its IP portfolio.

However, what has CGC trading down more than 8% after hours is topline revenues. Revenues slipped from Q4 to Q1 (from CAD$94.1 million down to $90.5 million). Part of this was explained by the “negative impact of revenue adjustments”.

Given the market reaction to Canopy’s previous earnings – most particularly revenues – it’s unlikely that the market will be focusing on the small-print here. With another drop in its share price baked into the cake in the near term, what should investors be looking at going forward?

Several things:
 

• Phase 2 of cannabis legalization in Canada. While Canopy Growth has not been one of the winners of Phase 1 of legalization, its operational depth should help the company do better in Phase 2. And unlike Phase 1, Canada’s retail cannabis sector is already at a critical mass
• Rapidly rising cannabis sales in Canada. Three consecutive months of double-digit growth in retail cannabis sales. More should be coming as Ontario (in particular) is finally ramping up retail capacity.
• Robust growth in cannabis cultivation. More harvested cannabis equates to greater revenue potential and provides the company with ample cannabis inputs for Phase 2 value-added products.
• Growing international and U.S. footprint. Canopy’s international operations reported revenue growth of 209% versus Q1 2019. Slightly further along the horizon, the company expects to start bringing U.S. CBD products to market. If the FDA does come through with promised improvements to CBD regulations, Canopy will be one of the bigger winners.

More generally, Canopy’s earnings will likely be a general drag on cannabis stocks. Intrepid cannabis investors will see this as an opportunity.

Major LP, Aphria Inc beat strongly on revenues. While it got a large bump in its own stock, there was no broader impact across the sector. Canadian cannabis extraction specialist, MediPharm Labs reported strong revenue numbers and profitability. No positive ripple effect.

The robust growth in Canadian cannabis retail sales is not a mirage. It’s the obvious result of Canada’s provinces finally opening enough cannabis stores. Investors looking ahead in the Canadian cannabis industry may want to look south – to Colorado.

Colorado is well ahead of Canada in building its own legal cannabis industry. But it’s still reporting its own monthly sales records at present, consistently.

In other words, the current rapid growth in Canadian cannabis sales isn’t merely sustainable for several months. It’s sustainable for (at least) several years.

With marijuana stock valuations trending in the opposite direction despite these fundamentals, this is an epic disconnect in markets. While Canopy Growth may not end up as one of the biggest winners going forward, current shareholders may want to (at least) wait for a better exit window.