The Motley Fool

A Swing and a Miss: Why Canopy Growth Corp’s (TSX:WEED) Earnings Were Disappointing

Image source: Getty Images.

It finally happened: Canopy Growth Corp (TSX:WEED)(NYSE:CGC), the largest cannabis company by market cap, released its quarterly earnings. The much anticipated results weren’t very impressive, however. Let’s see why the investing world largely yawned at the pot company’s latest financial results.

Revenues keep soaring

To be clear, Canopy remains the leader in the Canadian cannabis market. The firm still holds the largest market share, beating all of its competitors in terms of net revenues. During the last quarter, Canopy’s net revenues were $94.1 million (narrowly edging consensus estimates), a 300% year-over-year increase and a 13% increase quarter over quarter. Naturally, most of Canopy’s revenues (about 73%) came from the recreational market.

In this department, the firm is truly crushing the competition, as none of its peers comes close to its revenues within the recreational segment. Despite these positive results, however, investors have been relatively immune to soaring revenue figures in the pot industry, as has been the norm for most major pot firms.

So while it’s important to point out Canopy’s standing in the industry, it’s just as important to keep mind that insane revenue growth is widely expected of industry leaders such as Canopy. 

Net losses widen

Many pot companies aren’t profitable yet. Thus, Canopy posting a net loss isn’t particularly surprising. Still, not many people expected such a drop in the company’s bottom line. Canopy’s $323.4 net loss was a significant decrease from its $74.9 million third-quarter net profit.

Of course, last quarter’s net profit was not very impressive, as it was due to a decrease in its share price and the accompanying adjustment related to convertible notes.

That said, the $0.98 adjusted loss per share was wildly off most analyst estimates. The $97.7 million earnings before taxes, depreciation and amortization (EBITDA) was also worse than the consensus analyst estimates.

Although Canopy pinned the losses on sales and marketing investments as well as administrative costs, its bottom line was perhaps the most important factor that led to a decrease of more than 8% in the company’s share price.

What happens now?

Investors might also be wary of the fact that gross sales of marijuana, both in the recreational market and the medical market, were down compared to last quarter for the pot company. In particular, Canopy’s medical sales took a steep dive of more than 40% quarter over quarter.

On the other hand, the firm recently detailed a plan to enter the U.S. CBD market. By way of a reminder, the sales of CBD derived products are expected to soar past the $10 billion dollar mark in the coming years.

Naturally, this is too big of an opportunity to pass up. Canopy announced it had CBD operations in seven states south of the border already, and at full capacity, these operations could cover more than 4,000 acres. Further, the firm announced that its deal to acquire U.S.-based Acreage Holdings pending the relaxation of marijuana laws at the federal level in the U.S. was approved by the shareholders of both companies.

In short, Canopy is set to enter the largest market in the world (in a big way) if the U.S. federal government decides to roll back restrictions on marijuana.

Investor takeaway

Canopy’s revenues increased once again, and the firm still holds the largest market share in Canada. Just as important are the pot company’s current efforts to enter the U.S. market. If this pans out, Canopy will likely remain the king of the marijuana industry for many years to come.

That said, it’s hard to look past the company’s widening bottom line. While there’s definitely a silver lining, Canopy failed to deliver a stellar performance this time around. 

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Prosper Bakiny has no position in any of the stocks mentioned.


Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.