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Investors Shouldn’t Worry About Canopy Growth Stock’s Weak Q1

Chris Lau

Ahead of its earnings report set for Aug. 14, shares of Canopy Growth (NYSE:CGC) are already down by nearly 25% in the quarter. A combination of risk aversion and CannTrust Holdings (NYSE:CTST) single-handedly pulling down the cannabis sector are contributing to the drop in CGC stock. With Canopy Growth stock down by over 40% from its 52-week high, investors do not expect much from the upcoming report. But can Canopy Growth report strong enough results to reverse the downtrend?

Investors Shouldn't Worry About Canopy Growth Stock's Weak Q1

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Aphria (NYSE:APHA) shares rose from around $5 to nearly $7 after it reported quarterly results Aug. 2. It reported net revenue growth of a whopping 969% to $128.6 million CAD. Distribution revenue rose 72% to $99.2 million CAD while net cannabis revenue rose 86% to $28.6 million CAD. Importantly, the company reported cash levels of $571 million at the end of the quarter. Its annual production capacity will reach 255,000 kilograms when all its facilities are fully licensed.

By comparison, Canopy Growth reported revenue growing 312.5% year-over-year to $94.1 million CAD in the fourth quarter posted Jun. 20. Quarterly revenue grew 13% sequentially, helped by additional revenue generation from value-added products, extraction services and clinic partners. Shipments topped 24,300 kilograms.

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For the current quarter (the fiscal first quarter), Canopy expects to harvest around 34,000 kilograms. It ended the quarter with cash, cash equivalents available and marketable securities totaling $4.5 billion.

Canopy’s Sales Channels Growing

Investors should spot the glaring differences between Aphria and Canopy. First, Canopy has far more cash on hand and has Constellation Brands (NYSE:STZ) as its biggest partner. More worrisome is that Canopy’s production fell sequentially. Management blamed static platforms in Alberta and Ontario for slowing its output. In Alberta, additional licensing requirements for stores slowed production. And in Ontario, the ramp-up in store openings in April hurt its output. Canopy may only wait for these channels to grow. By Q3 or Q4, the channel should get bigger, while a favorable product mix should diversify its revenue stream.

Since Canopy is forecasting better production numbers as late as Q3, expect underwhelming output in tonight’s earnings report. A month before Canopy’s Q4 report, in May, the stock peaked at over $50 only to fall to below $40 when it reported results.

Other Expectations from First-Quarter Earnings

In the medical segment, revenue grew 170% year-over-year to $10 million CAD. A product transitioning to the recreational channel, plus the supply challenges in specific product categories, limited its growth. Now that it has been remedied, expect revenue from this channel to improve. Net annual gross revenue from the Canadian recreational channel, which totaled $140.5 million CAD, should grow again this quarter. Shipments nearly tripled to 24,000 kilograms in the last quarter. Canopy shipped 5 million units in the fiscal year, compared to around 1 million in the prior year.

Expect a big non-cash charge in the quarter. A new investor rights agreement subjects the firm to fair value adjustments. Canopy’s management reports that they expect to record a material non-cash charge related to these adjustments, which will contribute to a material net loss.

Increases in the company’s harvest will support its long-term view on revenue growth in the coming quarters. But sales of the Q1 harvest will be sold in sequential quarters (Q2 and Q3). This is due to the timing of post-harvest processing, value-added product manufacturing and the timing of lab testing and quality assurance processes.

Your Takeaway on CGC Stock

Brace for a weak revenue number from Canopy Growth in the earnings report. But since the market already expects these results, CGC stock may not fall by much. Cannabis investors need not be concerned over the short-term performance. Growth will come in later quarters as production continues rising and sell-through occurs in later quarters.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities. 

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