The marijuana industry is barreling toward what will likely be the most important day in its history: Oct. 17, 2018. On this date, Canada officially makes it legal for licensed dispensaries to sell recreational marijuana to adults aged 18 or 19 (depending on the province) and older.
The landmark passage of the Cannabis Act in June by Parliament is expected to generate billions of dollars in added annual sales for pot companies to our north. It's this massive surge in sales, and strong expected demand, that's fueled investors to purchase marijuana stocks in spite of their alreadylofty valuations.
Canopy Growth dishes on its latest quarterly results
However, no pot stock has been the apple of investors' eyes more so than Canopy Growth Corp. (NYSE:CGC). Canopy Growth is the largest marijuana stock by market cap, and has what's arguably the most recognized cannabis brand in its portfolio, Tweed.
It also reported its fiscal 2019 first-quarter operating results this past Tuesday. Given its relative importance as marijuana's most visible stock -- and the only pot stock currently traded on the New York Stock Exchange -- understanding how well, or poorly, this cannabis kingpin is faring has bearing on the entire industry.
With this in mind, here are a dozen takeaways from Canopy's Q1 report that you absolutely should know.
1. Canopy has a massive medical following
Sure, everyone might be focused on the expected influx of demand from the recreational side of the market, but don't overlook the more than 85,000 registered medical patients that Canopy Growth now boasts. Medicinal cannabis patients tend to yield better margins for growers given their growing preference for alternative cannabis products, such as Canopy's line of softgel capsules.
2. Its global footprint is growing
Even with a clear focus on snapping up domestic market share, Canopy Growth is really setting its sights on international expansion. In particular, it wants to export cannabis to the more than two dozen countries to have legalized medical marijuana. Its Spectrum Cannabis subsidiary ended the fiscal first quarter with a footprint in 11 countries, including the recently added Czech Republic, Colombia, and Lesotho.
3. It's about more than just dried cannabis
As noted, Canopy Growth is placing more and more emphasis on product diversity. While dried flower might be what your parents or grandparents are familiar with when the word "marijuana" comes up, there are no shortage of alternatives available today, including oils, edibles, vaporized cartridges, infused beverages, and concentrates, to name a few. During the first quarter, Canopy saw its percentage of total sales from cannabis oil climb to 26% from 23% in the sequential fourth quarter. As a higher-margin product, this is good news for the company and investors.
4. The average per-gram selling price is climbing
Having a greater percentage of total sales coming from its softgel capsule line, along with economies of scale beginning to take shape, is really helping Canopy's average sales price per gram. The company notes that the average per-gram selling price in Q1 2019 was $8.94 Canadian dollars, up from CA$7.96 in the year-ago quarter and CA$8.43 in the sequential fourth quarter. As long as it continues to incorporate alternative products into its portfolio, its average per-gram sales price could trend higher.
5. Further revenue diversification is possible
An interesting development during the quarter was Canopy's acquisition of Canopy Health Innovations (CHI). Beyond just selling cannabis products for recreational and medical use, CHI recently gained approval to run a phase 2b human clinical trial to evaluate the use of medical marijuana to treat insomnia. Canopy Animal Health, which is a subdivision of CHI, is also researching the use of cannabis products to treat ailments in animals. Should these trials pan out, the company could have even more sources of revenue.
6. Canopy Growth is ready for Oct. 17
The company's first-quarter report also shows that it's preparing for the official waving of the green flag on Oct. 17. It claimed inventory of 19,721 kilograms of dried cannabis, 14,985 liters of cannabis oil, and 1,055 kilograms of softgel capsules, as of the end of the quarter. Even with an initial shortage seeming likely throughout Canada, Canopy Growth appears set to capture significant market share.
7. Substantial provincial commitments
Considering how little is known about the supply-and-demand outlook, growers that can secure long-term supply agreements should in far better shape than those that don't. According to its first-quarter report, Canopy has landed an annualized delivery of 67,000 kilograms between British Columbia and Alberta, or an estimated 36% of total supply committed to these two provinces. That's a decent chunk of production that the company won't have to worry about finding a buyer for.
8. Sales could come from numerous platforms
Though we often think of cannabis as being sold solely in dispensaries, Canopy Growth is doing what it can to expand its sales footprint. It's added private brick-and-mortar retail locations to sell its cannabis products, and is focusing on online sales, in Manitoba and Saskatchewan. Its tightening partnership with Corona beer owner Constellation Brands (NYSE:STZ) should also help Canopy break into new markets.
9. Financing is no longer an issue
Speaking of Constellation Brands, financing is no longer even remotely a concern for Canopy Growth. Having ended the first quarter with CA$658 million in cash and cash equivalents, the company announced a CA$5 billion equity investment from Constellation this past week (just hours after released its Q1 report). Now sporting more than CA$5.6 billion in cash and cash equivalents on its balance sheet, Canopy is fully funded for the foreseeable future.
10. Attention now turns to branding and infrastructure
Despite all of this cash on hand, capacity expansion isn't on the agenda. Instead, Canopy Growth plans to deploy its cash by expanding its global reach and improving its international infrastructure. While doing so won't be cheap, nor will it happen overnight, diversification beyond Canada will likely prove important if dried cannabis becomes commoditized over time and drops significantly in price in its home market.
11. The company is losing a lot of money
But for all the good news Canopy Growth brings to the table, its bottom line is heading in the opposite direction. Considerably higher sales and marketing expenses, as well as general and administrative expenses, pushed the company to a quarterly net loss of CA$90.8 million, or CA$0.40 per share on an adjusted basis. That's more than six times the CA$0.06-per-share loss reported in Q1 2018, albeit a number of one-time costs impacted the current-quarter results. Even with sales of marijuana expected to soar, there's no guarantee that Canopy Growth will be profitable on a recurring basis anytime soon.
12. Dilution could be a multiyear problem
And, as always, dilution is a killer for pot stocks. According to the company's Canadian filing, it had approximately 200.2 million outstanding shares as of the end of the quarter, up from 163.9 million in the year-ago period. The company's recently issued CA$600 million in convertible debentures, along with warrants associated with Constellation's larger stake in Canopy, pave a path for increased shareholder dilution in the years to come.
In other words, even with a lot of things moving in the right direction, Canopy Growth's stock is still a bit of a nightmare for fundamentally focused investors.