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Canopy Growth: Should You Give Up or Hold On?

By Sushree Mohanty – Jun 6, 2020 at 7:12AM

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The cannabis company's unimpressive fourth-quarter results might urge you to abandon on this stock. Should you?

All eyes were on Ontario, Canada-based cannabis company Canopy Growth's (CGC -1.80%) fourth-quarter fiscal 2020 results -- especially after Aurora Cannabis (ACB -2.40%) raised the stakes with impressive revenue growth in its third quarter. But Canopy's results weren't up to par, and investors are skeptical.

What went wrong?

Various aspects of Canopy's Q4 results were less than ideal. For starters, it missed analysts' revenue estimates by a huge margin. Bottom-line losses were also higher than expected, with losses from adjusted EBITDA (earnings before income, tax, depreciation, and amortization) coming in at 102 million Canadian dollars.  Lower sales and rising operating expenses contributed to the losses. 

cannabis infused edible chocolate leaves with beverage

IMAGE SOURCE: GETTY IMAGES.

Lower Canadian recreational marijuana sales brought about a 13% fall in net revenue from Q3 2020. On the positive side, revenue for the quarter grew 15% year-over-year to CA$107.9 million, up 76% for the full year.

Management said in the earnings call that their "supply chain grappled with some complex products and production systems [in] a very dynamic market with shifting demand and evolving consumer preferences" during the quarter. 

Management's decision to shut down 22 of its corporate-owned Tokyo Smoke and Tweed retail locations across Canada in mid-March is also affecting revenue. Those stores have reopened now, but I fear that Canopy might have missed out slightly on the surge in cannabis demand amid the pandemic. Canada already has a shortage of legal stores -- and closures in a time of rolling demand could affect sales.

Strategies to reduce cash burn

When a company misses consensus estimates and reports below-par results, investors might overlook all that's happening behind the scenes. It may interest you to know that Canopy is working on reducing its cash burn and right-sizing its cost structure. For instance, it exited its operations in South Africa and Lesotho and closed one of its indoor facilities in Yorkton, Canada -- as management is confident its production capacity in Canada is more than enough to meet demand. 

To move to an asset-light approach, it also ceased operations at its cultivation facility in Colombia and its farming operations in New York. Instead, it will use its existing supply of hemp to produce hemp-derived CBD products for the U.S. market. The U.S. CBD space is a growing market that should only expand further as the U.S. Food and Drug Administration (FDA) continues to make progress in its evaluation of CBD. 

These strategies could help Canopy reduce costs, which could be key; after all, an asset-light approach is helping Cronos Group (CRON -3.75%) survive the pandemic with a strong balance sheet.  

A year of change

Management said fiscal 2021 could be a transitional year, one that may disappoint investors. Constellation Brands (STZ -1.71%) owns nearly 40% of Canopy, and under the leadership of former Constellation executive David Klein, Canopy is expected to see a new organizational design, new operational programs, and advances in supply-chain productivity. These changes could prove significantly beneficial. 

Look at how Aphria (APHA) CEO Irwin Simon turned his company around -- I vouch for it as a strong cannabis pick for 2020. I know why investors who expected Canopy to be a market leader in the cannabis space might be spooked about now, but despite the challenges, cannabis stocks did well last month; if demand continues, long-term prospects could be fruitful. Shares of Canopy Growth, Aurora Cannabis, Aphria, and Cronos have gained 14%, 67%, 28%, and 16%, respectively, in May, while the SPDR S&P 500 ETF (SPY -1.55%) has gained 7.6%.

Highs and lows in the industry

Note that marijuana is still an evolving, volatile industry, and ups and downs are evident. Canopy Growth still has strong financial support from Constellation Brands, plus an excellent, innovative product portfolio. It recently launched its most recent phase of cannabis 2.0 products, including vapes, chocolates, and cannabis-infused beverages.

Management's task now is to strategize quickly and well as it rolls out those new products, which still have tremendous potential to capture the market now that demand is stronger. The already launched cannabis-infused beverages are garnering good reviews, and these innovative products may end up capturing a whole new customer base. Now, with research indicating that some cannabis strains can help fight COVID-19, the potential for the marijuana sector is higher than ever.

Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.73 (-1.80%) $0.05
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$357.18 (-1.55%) $-5.61
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$229.68 (-1.71%) $-3.99
SPDR Series Trust - SPDR Portfolio S&P 500 Growth ETF Stock Quote
SPDR Series Trust - SPDR Portfolio S&P 500 Growth ETF
SPYG
$50.10 (-1.73%) $0.88
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.22 (-2.40%) $0.03
Cronos Group Stock Quote
Cronos Group
CRON
$2.82 (-3.75%) $0.11
Aphria Stock Quote
Aphria
APHA

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