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Canopy Growth (NYSE:CGC), Canada’s largest cannabis company by market cap reported its fourth-quarter results last week. They were a mixed bag sending Canopy Growth stock lower in early trading.
Source: Canopy Growth
Canopy Growth stock is up 63% year to date through June 20. Unless investor sentiment changes later in Thursday’s trading, the Canopy stock price will likely finish the day down by a significant margin.
So, the question investors are asking themselves is whether the news is negative, positive, or merely another earnings report in the company’s short history.
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Furthermore, for those who own the stock, is this an example of “selling on the news” or should you let your profits ride?
If you don’t own CGC stock, is the dip worth buying?
I’ll provide my two cents on each of these questions.
A Closer Look at Canopy Growth Stock
Canopy’s net revenue in the fourth quarter was C$94.1 million. That was C$3.5 million higher than the consensus analyst estimate. That’s a positive in my books.
In terms of the breakdown between recreational and medical pot sales, recreational accounted for C$68.9 million (before excise taxes) in sales in the fourth quarter, down from C$71.6 million in the third quarter.
You can view this decline in one of two ways.
The first way is that the third quarter, although two weeks shorter, outsold the fourth quarter, a sign that recreational pot sales aren’t hitting any home runs in Canada. The other way to look at it is that there was pent-up demand for pot before last year’s legalization; many people bought for the heck of it. That wasn’t the case in the fourth quarter, providing a more accurate sense of the recreational pot market going forward.
To me, I would lean to the latter explanation for the decline in sales. I view this news as nothing to see.
Earnings and Canopy Growth Stock
As for earnings, well, this is where the CGC stock price comes into play.
Analysts were expecting a loss of C$95.2 million or C$0.25 a share. Operationally, it lost C$174.5 million or C$0.51 a share, or C$0.98 if you include the C$130 million paper loss to account for the growth of its stock price and its relation to the company’s convertible debt.
So, it makes sense to go with the operational loss, which was 242% higher than in the same quarter a year ago, and 11% higher than in the third quarter.
Right there is why the stock is falling in early trading. Investors are wondering how far into the red Canopy will go before it starts to turn the corner to a pathway to profitability. On an EBITDA basis, Canopy acting CFO Mike Lee expects its Canadian business to be EBITDA positive within 18 months.