Canopy Growth Corporation (NYSE:CGC) announced its fiscal 2018 second-quarter results before the market opened on Tuesday. And the company proved yet again why it ranks as the top Canadian medical marijuana grower in sales.
But there's one thing that Canopy Growth can't claim: profitability. For the third quarter in a row, the company reported a net loss. Here are the highlights from Canopy Growth's quarterly update -- and why the current losses could make this marijuana stock a bigger winner over the long run.
By the numbers
Canopy Growth's sales momentum has ranked as the strongest among Canadian marijuana stocks, and that didn't change in the last quarter. The company reported second-quarter revenue of $17.6 million, a big 107% jump from the prior-year period. The figure also reflected a solid 11% increase over the first quarter in fiscal 2018. (All figures are in Canadian dollars.)
During the second quarter, Canopy Growth sold 2,020 kilograms and kilogram equivalents. This total was 73% higher than the same period in the previous year and 10% above the level sold in the first quarter.
Where Canopy Growth's revenue is coming from is changing a bit, though. The company said its Softgel capsules generated 18% of total revenue in the quarter ending Sept. 30. In the prior-year period, Softgel capsules accounted for only 14% of total revenue. This is important, because a higher mix of oil-based products like Softgel helped Canopy Growth boost its average selling price to $7.99 per gram in the second quarter from $7.01 per gram in the prior-year period.
Despite the impressive revenue growth, Canopy Growth posted a net loss in the second quarter of $1.6 million, or $0.01 per share. In the prior-year period, the company reported positive earnings of $5.4 million, or $0.05 per share. However, Canopy Growth has lost money in its two previous quarters, with a net loss of $4.4 million in the first quarter of fiscal year 2018 and a net loss of $21.1 million in the fourth quarter of fiscal year 2017.
Beyond the numbers
The $1.6 million loss in the second quarter is actually good news for investors. And it's not just because Canopy Growth's bottom line didn't look as bad as the previous two quarters.
Canopy Growth's press release announcing its latest quarterly update included the following statement:
Management believes the ongoing spending on building the company's significant and diversified production platform, world-leading brands, unparalleled international reach, and iconic partnerships, all of which directly impacted profitability during the current period, is a prudent long-term investment to strengthen the company's global leadership position heading into next year.
In other words, the company's executives know that current spending levels are causing it to post net losses but think that the investments should pay off down the road. There are several good reasons to believe that Canopy Growth's management team is right.
For example, in the second quarter, the weighted average cost per gram to the point of harvest was $0.72 -- much lower than the prior-year period cost of $0.99. This significant reduction in cost stemmed partially from operational efficiencies resulting from investing in additional capacity, including adding 12 new grow rooms.
Post-harvest costs came down also. The weighted average cost per gram during post-harvest was $0.53 in the second quarter of fiscal 2018, down from $0.71 in the prior-year period. Canopy Growth attributed part of this improvement to gains in the efficiency of oil extraction resulting from use of a custom-built extraction machine deployed at the end of the first quarter of fiscal 2018.
These examples show that Canopy Growth's previous investments in expanding capacity and improving operations are paying off. The investments the company made in the second quarter should also pay off in the future. In addition, Canopy Growth has hired new staff, particularly in sales and marketing, to get ready for what the company believes will be huge growth.
The company's expectations of significant growth seem to be realistic. Canopy Growth is moving into multiple international markets. Its partnership with Fortune 500 beverage company Constellation Brands, which also now owns nearly 10% of Canopy Growth, could open up even more opportunities. There's also the anticipated legalization of recreational marijuana in Canada next year, a move that would dramatically expand Canopy Growth's potential market.
Because of all these opportunities, a $1.6 million loss in the last quarter simply isn't a big deal for Canopy Growth. The spending that caused the second-quarter loss is heavily skewed toward investments to allow the company to grow in 2018 and beyond. And growing is exactly what Canopy Growth will likely do.