Why Profitability Matters: Canopy Growth Corp.

Canopy Growth Corp. (TSX:WEED) just turned in its fiscal year results, and investors aren’t pleased. Long-term investors should take note of management’s message: size matters and profitability doesn’t, at least for now.

| More on:

Here’s an exercise for investors ready to do some philosophical thinking: tell me about a company or an industry in which profitability simply doesn’t matter.

Canopy Growth Corp. (TSX:WEED) is an up-and-coming cannabis producer trying to convince its investor base that right now, profitability doesn’t matter. After all, iconic companies such as Amazon.com, Inc. and other high-flying technology, mining, pharmaceutical, or biotechnology stocks have told a similar story. Some have gotten away with the message, and some haven’t. What’s interesting about all of these companies, however, is that at some point, the laws of finance come into play and investors being demanding profits.

After posting dismal quarterly and fiscal year-end results, Canopy’s chairman and CEO Bruce Linton suggested that investors ignore the company’s current state of profitability and focus on the business’s expanding production ahead of legalization, which stands to come into effect in 2018. The appeal being made by Canopy’s management teams is for investors’ long-term patience — something which appears to be in low supply of late.

After the announcement by the Canadian government on April 12 that legalization would happen later than initially anticipated, many marijuana concerns, including Canopy, took a large hit — a hit which has not been recouped in large part due to a widespread lack of continued hype and excitement. These factors make the momentum trade less attractive for profit-seeking investors looking to take advantage of the latest hot commodity in the Canadian stock market.

This past year, Canopy’s loss widened to $16.7 million from a loss of $3.5 million, disappointing investors hoping for positive news on the profitability front. Revenue also underperformed expectations; quarterly revenue came in at $14.7 million, more than 10% lower than analyst estimates of $16.4 million for the period.

Herein lies one of the long-standing issues I have with Canopy and the whole marijuana industry in general since late 2016: growth expectations for these firms are simply out of whack. While Canopy was able to produce a 191% quarterly increase year over year, the company still came in more than 10% under the growth expectations of analysts. Canopy and other marijuana firms in the industry are under intense pressure to produce year-over-year growth of +200%. They will be forced to engage in sloppy acquisitions (Mettrum), massive production ramp up, and costly capital expenditures (plant upgrades and expansions into New Brunswick and Alberta), with less and less focus on long-term profitability and returning value to shareholders.

Investors hoping to cash in on a $1.3 billion company turning a loss of $17 million per year on quarterly revenues of $15 million may have to wait just a little bit longer.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

More on Investing

Doctor talking to a patient in the corridor of a hospital.
Investing

TFSA: Healthcare Dividend Stocks Are Perfect for Passive Income

Top healthcare dividend stocks like Extendicare Inc. (TSX:EXE) and others can provide huge passive income in your TFSA.

Read more »

TFSA and coins
Tech Stocks

TFSA: Invest in These 2 Stocks for a Legit Chance at $1 Million

Are you interested in building a $1 million portfolio? Invest $20,000 in these two stocks!

Read more »

edit Person using calculator next to charts and graphs
Investing

The Top TSX Stock on My Watch List Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) remains a top TSX stock that long-term investors seeking growth and yield will want to…

Read more »

Hourglass projecting a dollar sign as shadow
Investing

3 Stocks to Add to Your TFSA ASAP

Given their stable cash flows and solid underlying businesses, these three stocks are excellent additions to your TFSA in this…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Better Buy: Fortis Stock vs Enbridge

Fortis stock and Enbridge are top dividend stocks on the TSX today. Which stock is better buy for safe dividend…

Read more »

Canadian Dollars
Dividend Stocks

How to Make $1,500 in Passive Income 4 Times a Year

Blue-chip TSX stocks such as Enbridge can enable investors to create game-changing wealth over the long term.

Read more »

Woman has an idea
Investing

5 Stocks You Can Confidently Invest $500 in Right Now

Consider putting your surplus cash in these stocks for stellar capital gains.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA: How to Easily Turn $10,000 Into $500/Year of Passive Income

You don't need to be a stock market expert to turn $10,000 into a $500 of tax-free passive income. Here's…

Read more »