What happened

Canadian cannabis company Canopy Growth (NASDAQ:CGC) harshed marijuana sector investors' buzz Friday when it reported weaker than expected revenue growth in its fiscal 2022 second quarter, though it lost less money than Wall Street had forecast.   

As of 1:45 p.m. EDT, shares of Canopy Growth were down 14.3%, and the negative sentiment dragged on its peer pot stocks as well; Aurora Cannabis (NASDAQ:ACB) was off by 5.8%, and Tilray (NASDAQ:TLRY) was down 5.5%.

3 red arrows going down and crashing through the floor

Image source: Getty Images.

So what

So how bad was the news at Canopy Growth?   

On the one hand, it reported a net loss of $16 million for its fiscal Q2, which ended Sept 30. As management hastened to point out, this was "an $80 million improvement versus Q2 FY2021." However, the metric was better mainly because of "non-cash fair value changes of $233 million" -- not due to any improvement in the business.

To the contrary, revenues actually declined by 3% (not at all what you want to see from a growth stock), and if you net out the additional revenues contributed to the company by its recent acquisitions, revenue would have declined 13%. And gross profit margins on those revenues swung from 19% a year ago to negative 54% in its fiscal Q2.

Canopy Growth also continued burning cash, with an outflow of $101 million in the quarter, management said.

Now what

Suffice it to say that if marijuana sales are decelerating and profits on those sales are growing increasingly hard to come by, that bodes poorly for Tilray and Aurora Cannabis as well. Tilray delivered its most recent quarterly results early in October -- an $0.08 per share loss -- and Aurora did so in late September -- a loss of $0.55 per share. Aurora's next report is due Tuesday, and analysts are forecasting another loss. That seems even more likely given what the market just heard from Canopy.  

On the plus side, Canopy management says it still expects revenue acceleration in the back half of its fiscal year.  However, "the magnitude and pace of improvement is expected to be more modest than previously anticipated."

Canopy says it will focus on "stabilizing its market share of the Canadian recreational cannabis in the second half of FY2022." That's the kind of policy that could mean lower prices, lower profit margins, and more price competition with rivals, which could drive everyone's prices and profit margins down. 

If shareholders of Tilray and Aurora Cannabis are worried by what Canopy Growth had to say on Friday, maybe they have good reason to be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.