While earnings season is all but over for most stocks, for the cannabis business, it’s only beginning. On June 20, Canopy Growth (NYSE:CGC) will kick off a spate of quarterly reports from the industry, forcing owners of CGC to serve as proverbial guinea pigs.
“Because it’s the biggest, there’ll be a follow-the-leader type action, so a strong result will lift all boats,” explained Korey Bauer, the portfolio manager of the Cannabis Growth Fund (CANNX). He went on to say: “Investors will be looking closely at price and margins as everyone adjusts their numbers based on what the big companies are doing.”
Marijuana mania is still alive and well, and the owners of marijuana stocks are capable of putting a positive spin on clearly disappointing news. But as the realities of legalized cannabis, both good and bad, set in, investors are slowly but surely beginning to treat these organizations like companies that will sooner or later have to turn a profit.
However, the top and bottom lines are arguably the least important data nuggets for the owners of CGC stock. Other metrics are going to be much more telling indicators of how healthy Canopy Growth is becoming.
Canopy Growth’s Earnings Outlook
The initial and overarching response to next week’s Q4 and full-year results, of course, will be driven by the company’s sales and income levels.
As of the latest look, analysts are, on average, calling for revenue of $90.9 million (in Canadian dollars), up from the year-ago figure of $22.8 million. As far as earnings, analysts, on average, believe Canopy Growth is on pace to report a loss of 23 cents per share of CGC stock, narrowing the year-ago operating loss of 31 cents per share.
The heroic growth is entirely due to timing.
Canada legalized marijuana for recreational use in October of last year, jump-starting strong sales for several organizations that had long been prepping for that day. As a result, the year-over-year revenue jumps will look artificially impressive until after October 2019.
That said, sequential progress still counts. Canopy Growth generated sales of $83 million in Q3, with the bulk of the 256% boost coming from surging sales of recreational cannabis, which now makes up more than two-thirds of the company’s revenue. Canopy Growth lost 22 cents per share in Q3.
3 Things to Watch
While a large number of investors will certainly be eyeing CGC’s sales and profits, most of the so-called smart money will be looking at the less-touted data that may more directly foreshadow the company’s future. Three numbers will mean more than any others.
1.Average Selling Price
Since Q3 was Canopy Growth’s first as a seller of recreational marijuana, the year-over-year comparison won’t be too telling. But the company was able to sell recreational marijuana at a price of $6.96 per gram.
To its credit, per-gram prices for its medicinal cannabis were up year-over-year. With marketwide prices still falling as cannabis becomes more commoditized, however, price matters.
In Q3, Canopy Growth had access to 5.6 million square feet worth of growing capacity. Full use of that square footage could translate into output of more than 500,000 kilograms of cannabis per year. That would make CGC Canada’s second-biggest grower,
Investors may want to listen carefully to any updates on or changes to that number.
Finally, while investors have yet to balk at CGC’s spending, the slow realization that cannabis is a commodity has at least put some focus on its spending habits. During the upcoming earnings report, the owners of CGC stock could question, for the first time, whether all of the company’s operating expenditures are absolutely “worth it.”
On that note, while revenue nearly quadrupled in Q3, sales and marketing expenses more than quadrupled, while general and administrative spending soared 400%.
There’s still a chance Canopy can cost-effectively scale up, but it certainly hasn’t yet. Its operating expenses don’t include the cost of acquisitions.
Other Upcoming Cannabis Reports
Though Canopy Growth has some major news coming up, the owners of CGC stock aren’t the only investors on pins and needles. Hexo (NYSEAMERICAN:HEXO) is also expected to post its quarterly numbers later this month.
Some time will pass before the next big cannabis earnings report, though. Aphria (NYSE:APHA) could post its results sometime in July, as could OrganiGram Holdings (NASDAQ:OGI), given the timing of its previous quarterly reports. The same criteria increasingly being used to judge Canopy Growth will also be used to judge other cannabis companies
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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