eResearch | Canopy Growth Corporation (TSE: WEED; NYSE: CGC), the largest cannabis company in the world by market capitalization, struggled in 2019 due to growing losses and sudden changes in leadership, but its recently released FQ3/2020 earnings surprised analysts and created positive price momentum for its stock price.
Amidst continued losses year-over-year, Canopy beat analyst estimates for revenue and net income in FQ3/2020 as it made material progress in improving its bottom line compared with the previous quarter, with significant reductions in expenses from share-based compensation and SG&A expenses which have both historically been major deterrents to Canopy’s profitability.
In Canada, in October 2019, three new categories of products became legal (edibles, concentrates and topicals) and this is commonly referred to as Cannabis 2.0 due to the increase in the number of categories and potential for new consumers.
In the previous quarter, Canopy struggled with the introduction of its Cannabis 2.0 derivative products due to inventory write downs on its soft gel product line and overall delays on its Cannabis 2.0 product launches, which led to a rough end of the calendar year.
In contrast to Canopy’s setbacks for its Cannabis 2.0 product launches, its ancillary operations (companies not growing or selling cannabis) are keeping Canopy afloat as it has quadrupled in revenue year-over-year, mainly due to its vaporizer acquisition, Storz & Bickel, which was acquired last year.
Canopy’s stock price has dropped 51% in the past year but as the cannabis company moves into the new year with the introduction of Cannabis 2.0 products and plans towards profitability, its stock price has started an upward trend with a 14% increase year-to-date.
Canopy FQ3/2020 Earnings Highlights
- Revenue grew to C$136 million, a 39% increase year-over-year, with a 58% increase quarter-over-quarter, mainly due to approximately C$32 million in adjustments and inventory write-downs from its Cannabis 2.0 product setbacks in the previous quarter.
- Gross margin increased to 44% compared with 16% year-over-year, due to high margin ancillary revenues growing to C$33.4 million, a 400% increase year-over-year and a 42% increase quarter-over-quarter.
- Operating expenses increased by 34% year-over-year but declined by 14% quarter-over-quarter due to reductions in share-based compensation and SG&A expenses of C$31 million and C$20 million.
- Net loss was C$146.6 million, an improvement from a loss of C$374.2 in FQ2/2020 and C$1.3 billion in FQ1/2020.
Canopy is buildings its foundation to become the dominant leader within the emerging global cannabis industry, as it continues to invest in acquiring intellectual property, developing brands, and building international reach.
Though still negative in the bottom line, the progress Canopy has shown quarter-over-quarter has brought confidence from investors as the stock price starts to trend up this year. As Canopy starts to scale operations, fully roll-out Cannabis 2.0 products, and grow ancillary revenue streams, the cannabis company may see sustainable profitability sooner than expected.
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