Canopy Growth (CGC -5.85%) releases its third quarter results on Feb. 9, and it's shaping up to be a big day for the company. The Canadian marijuana producer has been homing in on the edibles market, launching a variety of new products in recent months, including products under the Martha Stewart brand. CEO David Klein has now been in charge of the company for over a year, and with many cuts and layoffs since he took over, the pressure will be on for investors to start seeing some significant cost savings. There are many things to watch for when Canopy Growth releases earnings, but let's focus on three of the most important.
1. Cannabis 2.0 sales
The cannabis 2.0 segment includes edibles, beverages, and vape products. It's an area that investors expect Canopy Growth to dominate. Prior to Klein's arrival, outgoing CEO Mark Zekulin said that the company had as many as 50 edibles products in its pipeline. But regardless of how many products it has today, what matters is the sales numbers that they generate. And heading into earnings, there's concern things are not going as well as they should be. Auxly Cannabis claimed in a Jan. 20 press release that it was the top-selling producer in the cannabis 2.0 market in 2020, according to data from Headset, commanding a 14% market share.
In Canopy Growth's most recent results, released on Nov. 9, 2020, sales from the cannabis 2.0 market were 8.7 million Canadian dollars for the second quarter and period ending Sept. 30, 2020. It's still a fairly small part of its total revenue (6.4%), but it could help drive a lot of growth for Canopy Growth if successful.
In 2019, Deloitte projected the market for edibles and other infused products could be worth CA$2.7 billion. And according to BDSA, in the U.S., the product categories that make up the cannabis 2.0 segment in Canada account for 50% of revenue. Edibles are shaping up to constitute a big segment of the market, and it'll be imperative for Canopy Growth to command that area if it wants to remain a top pot stock in the minds of investors.
2. Adjusted EBITDA
Canopy Growth has been busy slashing jobs and shutting down plants over the past year, and that should bring down costs. In December 2020, it announced the closure of five locations in Canada that, along with 220 employee layoffs, would save potentially CA$200 million in costs on an annual basis. That's in addition to closures it announced earlier in the year, slashing 500 jobs in March and another 200 in April. Canopy Growth did say it will incur up to CA$400 million in expenses in its upcoming two quarters as a result of its recent plant closures, but those costs will likely be excluded from its adjusted EBITDA calculation.
In the second quarter, Canopy Growth reported an adjusted EBITDA loss of CA$85.7 million, which was an improvement from the prior-year period when it incurred a loss of CA$150.4 million. It was also better than the first quarter, during which the company's adjusted EBITDA was negative CA$92.2 million for the period ending June 30, 2020.
But those modest improvements may not be enough. Rival Aphria regularly produces positive adjusted EBITDA numbers and Aurora Cannabis is also aiming to break even in its upcoming quarter. The pressure is going to be on for Canopy Growth to strengthen its bottom line and get closer to being in the black alongside its peers. If that doesn't happen, it could turn investors off and send the stock into a nosedive.
Cash is always a key consideration for any cannabis company. It's needed to facilitate growth and ensure a company doesn't resort to shares issuances, subsequently diluting its owners. Thankfully, Canopy Growth has an influx of cash due to its partnership with beer maker Constellation Brands, which owns 38.6% of the business and invested $4 billion into the company in 2018.
However, as of Sept. 30, 2020, Canopy Growth's cash balance was down to CA$673.3 million and short-term investments totaled CA$1 billion. In the six-month period up until then, it burned through CA$280.3 million from its day-to-day operating activities.
Cash isn't a huge concern for Canopy Growth right now. But if its cash burn doesn't improve, it could become a bigger sticking point with investors down the road. And while it does have Constellation there to help if it needs financial support, a lack of positive cash flow could make things difficult, especially given Canopy Growth's ambitious goal of eventually expanding into the U.S. market. It already has a deal in place with Acreage Holdings that it will be able to complete when legalization takes place. If the company's CEO is right and Canopy Growth is operating in the U.S. within a year, it's going to need to be in better shape financially; otherwise, the cash burn could quickly get out of hand.
Is Canopy Growth a buy today?
In the past 12 months, shares of Canopy Growth have soared more than 98% while the Horizons Marijuana Life Sciences ETF is up around 57%. But if the company isn't able to deliver on the three areas noted above, the pot stock could quickly plunge and lose some of these recent gains.
Although there's plenty of potential in its future, there are also many question marks for Canopy Growth. And until it can answer some of them and prove that the moves it has been making over the past year are paying off, this is still a stock I'd steer clear of.