Shares of Canopy Growth Corp. (TSX:WEED) took a dip after reporting underwhelming fourth-quarter results that clearly didn’t impress the general public.
Although the company saw Q4 revenue soar 191% year over year to $14.7 million, many analysts were looking for revenue to grow to at least $16.4 million. Canopy also disappointed many investors by dropping the ball when it came to near-term profitability, as gross margins fell to 10% from 53% during the same period last year.
Canopy isn’t trying to be profitable … for now
Bruce Linton, CEO of Canopy, said that he’s “not chasing profits for now” and that the company is more focused on capturing market share and expanding production to be better prepared for when cannabis is legalized across Canada.
Should investors really ignore profitability at this point? Or is Mr. Linton simply trying to stop shares of Canopy from more bleeding?
Canopy had $16.7 million in losses over the past year — up from a $3.5 million loss. Canopy is bleeding cash right now, and although the company is doing a lot of spending to better position itself for the future, I think investors would be wise to not follow Mr. Linton’s advice to ignore profitability at this point, because there are many other cannabis producers with promising growth prospects that are not bleeding huge amounts of cash like Canopy is.
Sacrificing near-term profitability with the hopes of capturing long-term market share is a strategy that works for some companies, but I’m not so sure this strategy will work out for a business the newly emerging cannabis industry. Cannabis is a commodity, after all, and in the end, the company that can produce the most high-quality product at the lowest cost will be the biggest winner.
Is Canopy, or any other cannabis stock, a buy after the recent plunge?
As fellow Fool contributor Chris MacDonald pointed out, Canopy, as well as the entire cannabis industry, will face absurd expectations going forward with analysts potentially expecting revenues to triple year over year. Although the negative momentum in the cannabis industry has stopped for now, there are still a lot of risks involved with owning shares of any cannabis company at current levels.
Profitability always matters, and Foolish investors should always take a CEO’s investment advice with a grain of salt.
If you’re comfortable with huge amounts of volatility and you want to speculate on cannabis stocks and the potential for a second rally, then you’re probably better off buying shares of a more efficient producer, like Aphria Inc. (TSX:APH)(NASDAQ:APHQF) or Aurora Cannabis Inc. (TSX:ACB), both of which have a management team that has a focus on operational efficiency and profitability over branding initiatives.
Sure, brands are great to have, but let’s be realistic. Most cannabis users want the best strain at the best price and probably aren’t willing to pay a premium because of celebrity endorsements.
Stay smart. Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any stocks mentioned.