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Is Canopy Growth’s Stock About to Double?

By Prosper Junior Bakiny - Feb 25, 2020 at 10:45AM

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Canopy Growth crushed estimates during the third quarter, and it could be just the beginning of a rebound.

Cannabis stocks had a disastrous performance in 2019. The Horizons Marijuana Life Sciences ETF  -- which holds many of the top pot stocks on the market -- slid by 39% last year. Several issues were responsible for marijuana companies laying a collective egg, including company-specific scandals, the difficult retail cannabis environment in Canada, and poor financial results. However, 2020 could be a very different year, and pot companies are looking to get back in the good graces of investors. 

One company that has already managed to woo the market back this year is Canopy Growth (CGC -1.40%). The Ontario-based company released its earnings report for the third quarter of its fiscal year 2020 on Feb. 14, and Canopy's financial results were strong enough to send its shares soaring by as much as 14%. On the heels of its strong performance in the third quarter, it is worth wondering whether Canopy's shares can double from their current levels ($20.30 per share), or even get back to their early 2019 high of about $52 per share.

Hand drawing upward pointing arrow.

Image source: Getty Images.

Canopy's third-quarter results

There were several things to like in Canopy Growth's third-quarter earnings report. First, the company's net revenue was 123.8 million Canadian dollars, and not only did this figure come out ahead of analyst estimates, but it also increased by a whopping 62% sequentially and by 49% year over year.

Canopy sold a little over 13,200 kilograms of cannabis during the quarter, up 31% year over year. Meanwhile, the company's average selling price per gram of $7.23 decreased by 1% compared to the prior-year quarter. Further, Canopy recorded a gross margin (before fair value adjustments) of 34%, up from 26% year over year.

Although Canopy is still not profitable, its net loss this time around wasn't as bad as it was during the second quarter. The company recorded a net loss per share of $0.35 during its third quarter, which was significantly better than the net loss per share of $1.08 it posted during the second quarter. With a growing top line and shrinking bottom line, could Canopy finally be on the way to delivering the kind of consistent financial results that will make investors happy?

Why the best may be yet to come

Canopy looks positioned to continue recording strong financial results. After all, the company's latest quarter did not include sales of derivative products.

The cannabis derivative market officially opened on Oct. 17, and Canopy unveiled its first lineup of derivative products in November. This product lineup includes Tokyo Smoke Pause, a dark milk chocolate product that contains two mg of tetrahydrocannabinol (THC) in each square and negligible amounts of cannabidiol (CBD), as well as non-alcoholic cannabis-infused beverages such as Tweed RTD, a canned drink containing two mg of THC each with several flavor options. Canopy has already rolled out some of these products on the market to be sold in legally licensed retail cannabis stores.

CEO David Klein said:

Our first edible products, premium chocolate products, shipped out of our Smith Falls facility in December 2019. Multiple products, Tokyo Smoke Go, Tokyo Smoke Pause and Tweed Baker Street, entered the market in December and have been selling out very quickly. Our next offering, Bean & Bud, is on track to be in market late February with additional SKUs following in the first quarter of fiscal 2021. 

Further, the retail cannabis environment should improve this year, particularly in Ontario, the largest Canadian province by population. Canopy should be able to benefit from this more than most of its peers due to its leading market share in Canada. In its press release, it said it "maintained leading market share in retail, at an estimated 22%, of the Canadian recreation market." These two factors could help Canopy continue delivering strong financial results. 

Is Canopy a buy?

The answer to whether Canopy is a buy isn't so clear cut. The cannabis industry will likely continue experiencing a lot of volatility, and many will choose to avoid cannabis stocks altogether as a result. However, for those comfortable with the risk and volatility, Canopy is one of the best investment options in the marijuana industry. And if the stock price doubles this year, today's price will look like a bargain in hindsight.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.81 (-1.40%) $0.04
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMMJ
$3.53 (1.15%) $0.04
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$2.60 (-4.41%) $0.12

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