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A Look at Canopy Growth Corp.’s Q1 Earnings: 2 Items That Should Concern You

Canopy Growth Corp. (TSX:WEED) released its first-quarter results on Monday which, once again, showed tremendous revenue growth of more than double last year’s tally. From just under $7 million in sales last year, Canopy Growth’s revenue for the most recent quarter grew to over $15 million for an increase of over 127%.

However, the news was not all good for the company as it posted another loss, as it did last year, despite a significantly improved top line. I will have a look at two concerning items that should give investors pause and think twice about investing in Canopy Growth.

Another quarter of fair-value gains

The company posted an unrealized gain on fair-value changes in its biological assets of over $21 million (in the previous fiscal year, it had gains of $60 million), which are driven by changes in estimates. As a result of the fair-value gain, the company posted a gross margin of $19 million this quarter, higher than its total revenue.

The concern I have with these changes is the role of estimates in determining the value of the assets. It could stand to reason that the variances might, at some point, go the other direction and result in a greater loss for the company. A large amount of change in fair values presents an element of uncertainty that might make investors hesitant.

Operating expenses tripled from a year ago

The company’s total operating expenses of almost $24 million were more than triple the $7 million that Canopy Growth incurred a year ago and wiped out all the improvements in the top line.

Specifically, the company’s sales and marketing expenses almost tripled, going from $2.26 million a year ago to over $6.4 million for the current quarter. General and administration expenses also more than doubled, going from $2.85 million to just under $7.5 million in Q2.

Compared to the previous fiscal year, the company’s expenses actually increased as a percentage of revenue. In fiscal 2017, Canopy Growth’s $52 million in expenses were 1.32 times revenues of $39 million. However, in Q1 the company incurred total expenses of almost $24 million, which were 1.5 times its total revenue.

The rate at which expenses are increasing are outpacing revenue growth, and this should be a concern for any investor.

Bottom line

Canopy Growth saw an overall net loss of over $4.4 million this quarter, which was up over 12% from a year ago. If not for the company’s fair-value gains, then the losses would have totaled over $26 million.

The issues surrounding Canopy Growth are not new, and the problems are only growing. Investors should be careful when considering whether to invest into the company as these issues may not go away soon and could be symptoms of much larger problems beneath the surface.

Although the stock is up over 127% in the past 12 months, the share price has appeared to stabilize recently and the hype may finally be dying down. I would not recommend investing in Canopy Growth given all the uncertainty that still remains in the industry and the company’s inability to record a profit, despite achieving strong revenue growth.

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Fool contributor David Jagielski has no position in any stocks mentioned.

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