Among all Canadian pot stocks, Canopy Growth (CGC -6.64%) remained investors' favorite for a long time, mostly because it has made many investors rich for a while. When Canada's medical cannabis market boomed, Canopy's shares gained more than 500% at one point in 2018.
This is probably the reason why investors still have hopes that the stock could rebound after its consistent failure to achieve profitability in the last two years.
Canopy has been seeing declining revenue the last few quarters. Investors hope 2022 could be brighter for the company. But its recent third quarter (ended Dec. 31) results tell a different story. Third-quarter results weren't satisfactory, but Canopy's stock still surged 20% after its results last week. Let's take a look at why.
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Canopy Growth's Q4 failed to impress investors
Another quarter of revenue dip and earnings before interest, tax, depreciation, and amortization (EBITDA) losses doesn't justify Canopy's stock price jump after the earnings. The top line dipped 8% to 141 million Canadian dollars for the quarter.
It is disheartening to see that the company that had an early mover advantage in Canada is now struggling to grow revenues. Canadian medical cannabis revenue fell 21% year over year to CA$61 million.
Most of it could be blamed on the regulatory holdups in Canada that delayed the opening of legal stores. Canopy's management also believes rising competition and pricing pressure are responsible for the declining revenues. Canopy's innovative portfolio of high-margin derivatives doesn't seem to help much either.
Its recreational revenue also declined 25% from the year-ago period. Canopy launched a high array of derivatives products last year, which received good customer feedback. But these products (vapes, edibles, concentrates, topicals, and more) failed to generate more revenue in the quarter, just $5.8 million, a decline compared to $9.6 million in Q3 fiscal 2021.
Profitability is taking longer than ever
Canopy has made every attempt in the last two years to cut costs and achieve profitability. Even though the cost-saving program is going as planned, revenue growth isn't adequate to generate profits. According to the management, by the end of Q3, the company had realized cost savings of CA$85 million.
Canopy managed to reduce its total operating expenses to CA$160 million from CA$578 million in the year-ago period. However, the declining revenues tied its hands to bring in EBITDA profit.
It reported an adjusted EBITDA loss of CA$67 million, not much improvement from a loss of CA$68 million in the year-ago period.
Is there any hope for this pot stock?
To answer the question in the title, I do not believe Canopy Growth is ready to rebound in 2022. In the Q3 earnings call, management shed some light on how the current quarter could turn out. The company expects COVID-related headwinds to affect sales in the current quarter. Medical sales in Europe could be down year over year due to increased competition in Germany in the cannabis flower segment. However, Canopy expects its U.S. CBD businesses' growth to be moderate in the quarter. The company also expects capital expenditure to go down and be in the range of CA45 million to CA$60 million for the full fiscal 2022.
But I believe this modest growth cannot help Canopy achieve profitability, at least not this year. It could take a few years before this pot company sees green in its bottom line. Investors who have the patience to wait until then can still buy and hold Canopy for the long haul to earn some fruitful returns.
Though the U.S. market presents a tremendous opportunity for Canopy and its partners, establishing itself in a new market could take a while. With strong competition from domestic cannabis players like Trulieve Cannabis, Green Thumb Industries, Cresco Labs, and more. These domestic multi-state players have garnered a loyal customer base by targeting all limited license markets and will be the first to benefit when federal legalization happens. It will be a tough fight for the Canadian players.
