After the market close on Thursday, Canopy Growth (CGC) finally reported March quarterly results. The key focus for investors was the numbers surrounding guidance for cannabis harvests in relation to FQ4 sales and the disappointing reliance on the recreational cannabis market in Canada that continues to struggle with delays and lackluster sales. Investors clearly didn’t like the numbers, sending the stock price down nearly 6% in Friday’s trading session.
The most eye-popping number from the quarterly report was the forecast for harvested cannabis to double in the June quarter to 34,000 kgs. The company only sold 9,326 kgs in the March quarter.
The forecast is for production to grow 350% in the mater of quarters with a forecast for the harvest to easily double in the current quarter from the 14,469 kg harvested in the March quarter. Canopy Growth only harvested 7,556 kg as recent as the December quarter.
For FQ4, net revenues reached C$94.1 million for QoQ growth of 13%. Canopy Growth came close to becoming the first cannabis company to reach quarterly revenues of C$100.0 million.
Key selling prices remained stable, but again this is relatively old data going back to March. The average selling price per gram did dip to C$7.49 or 11% from last FQ4. The key issue with pricing is that all of the increased sales came from recreational cannabis in Canada with an actual decline in the high priced International medical cannabis market.
Remember that Canopy Growth just produced a press release dedicated to International operations to only report that sales amounted to a less than impressive 130 kg, down from 176 kg last FQ4. Even the Canadian medical cannabis sales plunged nearly 50% so investors need to consider that the large cannabis company is nothing more than a glorified Canadian recreational cannabis company.
Canopy Growth is still investing very aggressively for the future. For the March quarter, gross margins plunged to only 16%. The rush to have the largest cannabis business is coming at a high cost.
When the gross margin is only C$15.0 million, a company can’t spend C$65.7 million on general and administration costs alone and expect to reach any level of profitability. Other operating expenses added another C$80.0 million in costs to lead to the substantial adjusted EBITDA loss.
Canopy Growth reported a massive C$97.7 million EBITDA loss in the quarter. The loss surged from only C$21.7 million last year and C$75.1 million in the prior quarter.
(Source: Canopy Growth FQ4’19 earnings release)
The market will have a hard time looking past these large losses.
The key investor takeaway is that Canopy Growth remains too richly valued considering the diminishing prospects within Canada and the lack of actual progress in international markets. The company has substantial inventory that will hit the weak market by the September quarter while still generating substantial losses.
The biggest question for Canopy Growth is margins in an environment when higher supply will hit prices and the Cannabis 2.0 delay will impact sales while costs mount. The C$20 billion valuation remains difficult to justify when the forecast of the CEO for sales to reach C$1 billion in the next year remains highly challenged.
If Canopy Growth only traded at 10x these sales estimates, the stock would lose 50% of its value. The company better spin a great story on the earnings call for the stock price to hold up.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.