Shares of cannabis pure-play company Canopy Growth Corp (NYSE:CGC) fell as much as 11.7% in trading Wednesday after reporting fiscal fourth-quarter 2018 results. The slide in shares got worse as the day went on, and at 3:35 p.m. EDT, shares were still down 9.8% for the day.
Revenue jumped 55.6%, to 22.8 million Canadian dollars, in the quarter as demand for cannabis products continued to rise. But gross margin fell from 61.8% a year ago to just 37.4%. At the same time, operating expenses jumped from CA$23.4 million to CA$58.2 million, leading to a net loss of CA$54.4 million.
There's no question that cannabis demand is growing, and that's boosting the entire industry, but falling margins and rapidly rising operating costs are concerning and will eventually have to turn around for Canopy Growth.
One of the big challenges with growth stocks is that it takes a tremendous amount of operating cost to fund research and development, sales, and administrative activities that drive growth. That's what we're seeing at Canopy Growth, and we don't know yet when the financials will reflect the investment being made today.
Ever since the company went public, this has been a high-risk, high-reward stock. My concern is that it has a long way to go to live up to its CA$5.7 billion market cap. That's what will keep me out of the stock today and until we see significant improvements on the bottom line.