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Why Canopy Growth Stock Is Sinking Today

Keith Speights, The Motley Fool

What happened

Shares of Canopy Growth (NYSE: CGC) were sinking 12.3% as of 11:11 a.m. EDT on Thursday. The Canadian cannabis producer announced its fiscal 2020 first-quarter results after the market closed on Wednesday. And those results were ugly.

Canopy reported that its net revenue in Q1 slipped nearly 4% from the previous quarter to 90.5 million in Canadian dollars. The company also posted a massive net loss of CA$1.28 billion, or CA$3.70 per share, the worst bottom-line performance in its history.

Shadow of Canadian maple leaf on top of a pile of cannabis leaves.

So what

Sometimes the headline numbers aren't as bad as they might seem at first glance. For example, Canopy's huge net loss stemmed primarily from a CA$1.18 billion adjustment related to changes to warrants held by its partner Constellation Brands. This adjustment resulted from Canopy Growth's deal to acquire U.S.-based cannabis operator Acreage Holdings.

On the other hand, quarterly numbers can also be just as horrible as they look at first. Canopy's Q1 revenue slid sequentially because the company reported sales of cannabis oils and softgels that were only a fraction of the revenue recorded in the previous quarter. This much lower revenue total for oils and softgels was due to an adjustment that Canopy made for estimated product returns.

The company stated that it performed an evaluation of inventory levels in the Canadian provinces and territories alongside recent demand and sales trends. After completing this evaluation, Canopy decided to write off CA$8 million in gross revenue in anticipation of product returns. Even allowing for this adjustment, the company's cannabis oil and softgel sales were much lower in Q1 than they were in the previous quarter.

This should be only a temporary issue. Canopy Growth CEO Mark Zekulin said that the company still expects sales growth for oils and softgels in the future. However, the Q1 sales decline took investors by complete surprise, resulting in today's sell-off.

Now what

Canopy Growth expects to move past the issues that plagued it in the first quarter. Zekulin even predicted that Canopy will achieve an annualized revenue run rate of CA$1 billion by the end of fiscal year 2020 and is on track to become profitable within the next three to five years.

Investors have every right to be skeptical about such predictions, though, after Canopy's abysmal first-quarter performance. Canopy Growth has a lot of convincing to do in the next few quarters.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com