Should Investors Be Concerned About Canopy Growth Corp’s (TSX:WEED) Q1 Results?

Canopy Growth Corp (TSX:WEED)(NYSE:CGC) saw terrific growth last quarter, but is that enough to make the stock a buy?

| More on:
Red siren flashing

Image source: Getty Images.

While the euphoria and excitement around a $5 billion deal with Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) and Constellation Brands has led to the cannabis stock hitting over $40 a share for the first time since June, investors shouldn’t lose sight of the fact that Canopy Growth recently reported its quarterly results, which weren’t all that impressive.

Although Canopy Growth did grow its sales by 63% from a year ago, there were still many things on its financials that raised concerns for me, and that investors shouldn’t ignore. The obvious one is the big net loss the company reported totaling over $90 million, which was nearly 10 times the loss that Canopy Growth recorded a year ago.

What makes that number even more concerning is that this occurred after the company benefited from fair value changes in its biological assets of over $30 million, which was more than triple the $9 million gain that it posted a year ago.

Why did the company still post such a big loss?

Costs have soared across the board, plain and simple. Gross margins have declined as well, as a year ago, Canopy Growth kept 55% of its sales after direct costs, compared to just 43% this past quarter. In terms of dollars, however, the change amounts to a little more than $2 million.

The big increase came from the company’s operating expenses, however, where costs more than tripled from a year ago. In particular, share-based compensation was more than 10 times higher than it was last year, rising by more than $20 million. General and administration expenses were up $12 million, or 161% higher than a year ago.

As a result, Canopy Growth’s loss from its operations grew from just $4 million last year up to $31 million this past quarter.  It also didn’t help that the company incurred over $60 million in other costs, which were mainly related to its investments and acquisitions. That turned a bad quarter into a downright awful one.

Is cash a problem?

Investors also shouldn’t ignore the company’s cash flow statement, as there are concerns there as well. In the past quarter, Canopy Growth used $67 million in cash from its operations and needed to issue $600 million in debt. While the injection of cash from Constellation will help in a big way, if Canopy Growth doesn’t start generating more cash on its own, then it’s still going to be a problem down the road. The company’s ambitious growth and plans for expansion around the world mean that it’s going to be burning a lot more cash in future quarters.

Bottom line

If you’re only looking at sales growth, then Canopy Growth did well this past quarter. However, if you’re considering any figures below the top line, then it’s a much different story. Cannabis investors have by and large turned a blind eye to the losses that marijuana companies have incurred with regularity, blaming it on early growth and expansion.

The problem is that sooner or later, investors are going to be expecting some more tangible results, and it can’t just be future expectations that keep pushing the stock price higher. At some point those future results should start being realized, otherwise, the stock could be headed for a big correction.

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 David Jagielski has no position in any of the stocks mentioned.

More on Investing

Nuclear power station cooling tower
Energy Stocks

Why Shares of Cameco Are Powering Higher

Cameco (TSX:CCO) shares have surged more than 400% in the last five years alone, with more growth on the way.

Read more »

A bull outlined against a field
Stocks for Beginners

Bull Market Buys: 2 TSX Stocks to Own for the Long Run

Are you looking for stocks that could see a bull run for decades ahead? Here are two top TSX stocks…

Read more »

financial freedom sign
Dividend Stocks

Million-Dollar TFSA: 1 Way to Achieve to 7-Figure Wealth

Achieving seven-figure TFSA wealth is doable with two large-cap, high-yield dividend stocks.

Read more »

analyze data
Dividend Stocks

How Much Will Manulife Financial Pay in Dividends This Year?

Manulife stock's dividend should be safe and the stock appears to be fairly valued.

Read more »

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Diggers and trucks in a coal mine
Metals and Mining Stocks

1 Canadian Mining Stock Worth a Long-Term Investment

Cameco (TSX:CCO) stock could be a great long-term investment for Canadian growth seekers.

Read more »

Pot stocks are a riskier investment
Investing

Could Investing $10,000 in Aurora Cannabis Stock Make You a Millionaire?

Let's dive into whether Aurora Cannabis (TSX:ACB) could be a potential millionaire-maker stock, or a dud, over the long term.

Read more »

stock analysis
Energy Stocks

Is Enbridge Stock a Good Buy in May 2024?

Boasting high-yielding dividends and a stable underlying business, Enbridge (TSX:ENB) might be a great buy for your self-directed investment portfolio…

Read more »