Canopy Growth continues to disappoint, and I’m just as frustrated as you are…

Canopy Growth Corp. (NYSE: CGC) reported its earnings today and the news was bad. In particular, revenue looked like it was down if you weren’t paying close attention.

EBITDA losses were up, and gross margin appeared negative.

So what’s really going on at Canopy?

It’s clear to me that Constellation Brands (NYSE: STZ) is exerting its increased influence over the company. In May, Canopy hired a Constellation executive as Chief Financial Officer. In July, Constellation engineered the firing of long-time CEO Bruce Linton.

And last month, Constellation made its own Chief Financial Officer the Chairman of Canopy’s Board of Directors.

Actual revenues associated with shipments from Canopy were up 6% for the quarter – the decline was because Canopy took a charge for a bunch of old inventory that was never going to sell at a profitable price.

Mostly, what we’re talking about here is cannabis oil, which is a perfectly effective product for medical users but one that offers no sensual enjoyment and was never going to be an important product in the recreational market.

Canopy made the mistake of making too much of this (Tilray Inc. (Nasdaq: TLRY) did, too) and now the company is paying for that mistake.

I’m actually pleased that Canopy is taking these steps, but I also have to be honest and say that the adjustments the company had to make were much larger than I thought and larger than the company intimated the last time it talked to investors.

That’s why the stock is down today and I am not happy about it.

On top of everything I mentioned above, there were some other reasons the Canopy stock price dropped…

Canopy and Canada

Canopy was affected by falling prices in Canada.

Canopy has some high-quality brands – like DNA Genetics – but most of the company’s combustible cannabis is pretty average in quality and price, and that’s where the pricing pressure has been. Some of that price pressure is on the consumer level and some is because the provincial distributors originally bought too much inventory and are adjusting.

Finally, the lack of stores in Canada, which we’ll look at below, is holding back the size of the legal market for our neighbors up north.

But there were some bright spots in the quarter.

The Good from Canopy

Revenue from dry cannabis sold directly to consumers was up 25%, and that’s bullish for Canopy’s growing portfolio of company-owned stores.

Medical sales were up nicely, though from a small base and into a market which is growing slowly. And international medical cannabis sales were up over 70%. That’s from a small base, but the international exposure is a big part of the growth story and a key advantage that Canadian cannabis companies have over companies based in the United States, so it’s a huge positive that the growth in that market is finally occurring in earnest.

And of course Canopy’s liquidity, the most important asset a company can have in this market, remains strong, with over C$2.7 billion in cash on the balance sheet.

But that cash and the size of the company’s operating losses make Canopy a very large ship, and it needs a captain.

One sector of the cannabis market is skyrocketing. In fact, it’s projected to hit $22 billion by 2022. To learn more, click here.

Canopy fired Bruce Linton over four months ago.

I understand it’s important for Canopy and Constellation to take their time to find exactly the right person, but Canopy’s CEO role is one of the most high-profile jobs on the planet – there should be a very small number of suitable candidates and Canopy should have talked to all of them already.

I was hoping for Canopy to announce a CEO with these earnings.

Its failure to do so is a big failing. It says it is down to a “very short list” of candidates and hopes to have an announcement in the coming weeks, so we can look forward to some good news on that front shortly.

But Canopy needs to make two moves fairly quickly to turn things around.

Canopy’s Future

Canopy needs two things to turn around.

Hiring a CEO is one.

The other is getting more stores to sell cannabis, particularly in Ontario. I’ve written about the pathway to those stores, but the timing is uncertain.

The last piece of good news is that there are catalysts ahead to turn things around for Canopy and the industry as a whole.

The first thing that will help start the turn is Cannabis 2.0. Canopy has already registered 30 products for sales, including chocolates, beverages, and vape products. All but the beverages are approved for production by Health Canada, and Canopy should be ready to ship beginning next month.

Beverages, in particular, are a big part of why Constellation invested in Canopy in the first place – they expect cannabis beverages to take a big part of the alcohol market and, if they’re right, we could be talking about Canopy as primarily a beverage company by this time next year.

And whether the breakout product is beverages, or edibles and vapes the way it has worked in the United States, that shift to better products will increase Canada’s market size significantly.

Research shows that many Canadian consumers have sat out the legal recreational cannabis market entirely so far and are waiting for these new products.

Next, international revenues will become more important as time goes on. Canopy not only exports cannabis, it has built cultivation facilities around the world to meet the emerging demand for medical cannabis products. Those products have higher prices and higher margins than Canadian recreational products.

Finally, those new stores in Ontario will eventually open.

It’s not just the province that wants more stores; cities like Mississauga, which initially refused to allow cannabis stores, is now rethinking that stance.

The mayor of Mississauga recently said she was “startled” by the size of the illicit market in her town. The hundreds of thousands of dollars that neighboring cities are receiving from cannabis stores may also have some influence on her thoughts.

And when those stores open, the Canadian market can start to grow toward its potential, which is over five times as large as the current legal market.

The market is incredibly frustrated with Canopy at this point.

I share that frustration.

It’s going to be a while before this company’s stock starts recovering unless Canopy announces a share buyback or that new CEO is a blockbuster.

But the long-term picture still looks bright for this company.

I’d use weakness over the next few days and weeks to build a position in Canopy if you don’t already have a position.

Take care,

Greg Miller

Executive Director, National Institute for Cannabis Investors

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Comments

17 responses to “Putting the Latest Results from Canopy Growth Under the Microscope”

  1. What about the incredibly high number for share based compensation? They paid more in share based compensation for the quarter than their revenue???!!! What’s up with that??

  2. I just sent an e-mail questioning the market and CGC. Obviously too soon, just found Greg’s article on CGC. Thanks

    Terry

  3. Is all your information on cgc on the up an up? Where does Canopy Rivers come in with CGC? Are they very important to CGC?

  4. CGC is in major trouble and the Acreage deal did not crown Canopy Growth Corporation the Microsoft of Cannabis. Divestment is an earnest possibility by Constellation with their CGC investment. STZ has already lost over $2 billion US dollars with their CGC investment. If STZ decides to buy CGC at $8 share which is CGC’s true value, Canopy shareholders would lose massively in the “undertaking”. Many burned shareholders have had it and there are still serious write downs in both STZ and CGC’s future still yet to come in the next year worth of earnings reports. Investors have much better choices than CGC, ACB, OGI, EMHTF, and others. CGC is hopeless and helpless to themselves, so one can only imagine the inferior position Acreage Holdings is in now.

  5. I have had CGC for a long time. The best thing that ever happened was STZ buying 38% of the stock, putting CGC on the map for investors.

    It seemed to me that the “SAINT” Bruce Linton did not do a whole lot for CGC that investors look for. I did not see growing sales. I did not see growing profits. Quarter after quarter LOTS of money was spent with no growing sales and growing earnings.

    CGC STRONG POINTS AND PROBLEMS GO WAY BACK TO BRUCE LINTON.

  6. The cannabis market is one that you must ride out. I believe that we will all look back in a year or 2 and be glad we hung on. I am down 45% in my overall cannabis holdings but try to maintain this perspective. the industry is still trying to find its way and when the governments of the world either get in or get out of the way things will change. JMO

    • I’m with you. I’m hanging in there for the long term. There are some good buys in cannabis stocks right now. I think you may be able to buy CGC for $15 US a share and that’s a Heck of a discount. Time to pick up more or get in the market. ACB is trading at a Heck of a discount too. Their earnings call sounded very optimistic for the long term.

  7. CGC really worries me. A ship without a rudder is going nowhere! I believe it was a mistake getting rid of Litton. There really is no one in North America with as much knowledge of the industry as him.

  8. I am a recent widow 85 yrs young. I believe in waiting for the tide to turn just wonder and hope I can wait asI am down 63percent with cgc but I have faith.

  9. I am going to hang in there with Canopy, I still think they will be ok, they have the money behind them, I am down quite a bit, however I will be buying more stock very soon, when the price is right, not afraid to hold on, I have faith in this Canadian Company that has worked so hard to get where they are, they will come back I know it. We just have to get rid of the black market and let the Retailers open shops where ever. Too much Government control right now.

  10. I remember Woodstock, I wasn’t there. The Vietnam war, I wasn’t there either..However they did have something in common..Alcohol is a drug, tobacco is a drug, yet they’ve not been banned. I’m sure a lot of people have died directly because of these drugs..I’ve heard a drop of pure nicotine is deadly. Not sure about that one. Bottom line “pot won’t kill people” The CBD oils are helpful and better than any opioid for pain. Opioids do kill people…Enough said..

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