Last quarter was an unusual one for Canopy Growth (CGC -6.45%). The troubled cannabis producer didn't incur huge impairment charges, its loss was just a tiny fraction of what it was a year ago, and it even achieved year-over-year revenue growth. Has the business finally turned things around, and is now a good time to buy the stock, or is this just a one-off result for the company?
Revenue growth was less than 3%
For the first quarter of fiscal 2024 and the three-month period ended June 30, Canopy Growth's net revenue totaled 108.7 million Canadian dollars ($80.4 million), showing a modest single-digit improvement from the prior-year period when net revenue came in at CA$105.9 million.
The biggest growth driver was its BioSteel business, which features sports hydration products. Its sales more than doubled to CA$32.5 million, now accounting for nearly a third of Canopy Growth's top line. Storz & Bickel, the company's vape business, was the only other segment that generated double-digit percentage revenue growth; its sales grew by 16% to CA$18.1 million. It would have been a stronger growth quarter for the company if not for its retail cannabis business, which Canopy Growth has divested from, and, as a result, generated no revenue during the period.
Image source: Company filings. Chart by author.
Even though the Canadian pot market may not be all that strong, with a diverse business, Canopy Growth does have some operational segments that can perform well. The problem is that those segments aren't necessarily profitable.
Canopy Growth's loss shrank, but its margins remain nearly nonexistent
Amid the stronger revenue growth, Canopy Growth did see an improvement in its overall gross margin. But at CA$5.9 million, it was a tiny slice of revenue. At least it was positive, however, as a year ago, the company reported a negative gross margin of CA$5.6 million. The company did slash expenses, but ultimately it was a lack of significant impairment costs that resulted in a smaller net loss this time around. In the same period last year, Canopy Growth incurred asset impairment and restructuring charges totaling more than CA$1.7 billion. This past quarter, those costs were less than CA$2.2 million.
What's bittersweet for investors is that Canopy Growth's fastest-growing business is also the one with the worst margins of them all. During the period, BioSteel reported a negative gross margin of 24%. And as it works on simplifying its operations and reducing cash burn, one of the options on the table that Canopy Growth is considering is the potential sale of BioSteel, which has been a cash-burning operation.
Image source: Company filings. Chart by author.
Canopy Growth remains as risky as ever
Although Canopy Growth has been reducing costs, the business is still nowhere near profitable. The company's net loss would have been higher if not for other income of CA$51.5 million, which was due to an increase in the fair value of its investments. Its operating loss of CA$91.3 million represented 84% of net revenue. Regardless of how much the company trims in salaries and overhead, if its gross margins are a minuscule 5% of revenue, there's little hope of the business being able to stay out of the red.
Canopy Growth's earnings this past quarter weren't as impressive as they may have appeared to be at first glance. Its problems with lack of revenue growth (in its cannabis segments) and poor gross margins aren't going away. And as long as that's the case, investors shouldn't waste their time on this troubled pot stock.
