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When Will Canopy Growth Corp. Turn a Profit?

Photo: Plantlady223. Licence: https://creativecommons.org/licenses/by-sa/4.0/ Source: https://commons.wikimedia.org/wiki/File:Young_cannabis_plant_in_the_vegetative_stage_01.jpg

Canopy Growth Corp. (TSX:WEED) presented its fourth-quarter (Q4 2017) and full-year financial results on June 27. While there was an increase in revenues, the increase in quarterly and annual losses left some investors worried as to whether or not the company will ever turn a profit at all.

Although the company reported an impressive 50% quarter-on-quarter revenue growth to $14.7 million and 214% year-on-year revenue growth to $39.9 million, the bottom line was a complete mess. The quarterly and annual losses more than quadrupled from the comparative period last year.

After being asked when Canopy expects to turn a profit during the earnings conference call, the CEO Bruce Linton responded that the company was “intentionally not turning one,” so it can “make a more substantial hit in 2018.”

Linton believes that right now the company is trying to implement an Amazon.com, Inc. web services-like business strategy, as seen with the new Tweed Main Street online store. Linton said that Canopy is busy acquiring long-term clients and trying to occupy the best spot possible, but the company could turn to profit “any time, if (it) wanted to be profitable there are things (it will) stop doing which are preparing for tomorrow.”

The company is clearly pursuing growth and foregoing current profitability and will likely “keep investing for at least another quarter or two.”

If investors are to take this senior insider’s guidance seriously, then the market may not be reviewing any profitable earnings reports from Canopy in the next two or three quarters.

This is especially so if the company continues on its current aggressive expansion path as it prepares for the coming recreational marijuana legalization era.

To add more, Canopy has applied for a licence to establish new production facilities in Germany, and the company could be a favourite to be awarded one of the limited contracts to be issued.

If this were to happen, Canopy may go into another start-up phase in Germany by late 2018; it could start rolling another expansion program there and would probably return to loss making again.

The good thing is, Germany has a different distribution model which prohibits direct selling. Pharmacies only are licensed to sell cannabis to patients. Germany expansion might not require the same selling and distribution roll-out as in Canada, saving Canopy significant expenses.

There is a threat to future gross margins as Canopy has introduced some low-priced sun-grown cannabis varieties which are being grown outside the enclosed growing room system at Tweed Farms. These are being sold at a discount to indoor varieties.

It was the low-priced sun-grown inventory introduction towards the end of the accounting period that severely reduced gross margins for the last quarter.

Canopy is introducing cannabis gel capsules to the market. The company may have discovered a new premium marijuana niche in gel capsules and could improve margins there.

The biggest threat to profitability is the company’s quest for growth through acquisitions. There may be one or two acquisitions in the near future, but chances are that the company may be consolidating now and is seeking to show investors at least some profit in the next two quarters.

Investor takeaway

While Canopy is a leading international marijuana player, the company’s recently increasing losses are worrying, and this makes it a highly speculative play.

However, management will be under pressure to “show investors some money,” so Canopy may have to balance profitability and expansion costs in the coming two or so quarters.

There could be some great investment rewards in the long term, but investors may have to endure the current pain of corporate losses and share price volatility to enjoy future long-term capital gains.

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

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