Canopy Growth Corporation: Were Expectations Too High?

Canopy Growth Corporation (TSX:WEED), one of the Canadian marijuana stocks, saw a significant increase in its higher-margin product sales during the second quarter

SmallCapPower | November 19, 2018: Canopy Growth Corporation (TSX:WEED) (NYSE:CGC), one of the Canadian cannabis stocks, Wednesday announced its Q2 2019 financial results. Revenue rose by 33% YoY to come in at $23.3 million compared to $17.6 million in the corresponding quarter last year. Healthy top-line growth can be attributed to an increase in the number of active registered patients, increase in the average selling price per gram, and a change in its product mix towards higher margin oils and Softgel capsules.

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Oils, including the Softgel capsules, accounted for 34% in Q2 2019 versus 18% in Q2 2018, of the product revenue, showcasing an increased demand for value-added products. These products require lower active ingredient inputs and provide higher margins. Active registered patients grew to 84,400 from 63,000 in Q2 2018, a 34% YoY increase.

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In Q2 2018, the Company sold 2,197 kilograms and kilogram equivalents at an average sale price of $9.87, up from 2,020 kilograms and kilogram equivalents at an average price of $7.99 in the prior-year period, representing an increase of 9% and 24%, respectively. The average price increase was a result of changes in the product mix, principally a higher percentage of Softgel sales and sales to Germany.

Adjusted EBITDA for the second quarter amounted to a loss of $57.7 million compared to a loss of $4.8 million in the same period last year, due to an increase of 43% YoY in sales and marketing costs and 48% YoY increase in general and administrative costs.

Canopy Growth Corp reported a Q2 net loss $330.6 million, or $1.52 per share, for the quarter, compared to a net loss of $1.6 million, or $0.01 per share, in the comparative quarter last year.

Canopy Growth Chairman & Co-CEO Bruce Linton said, “With extensive investments over the past year, including most notably in the second quarter, in branding and retail development, our entrance into the retail cannabis market has been a success with our SKU assortment obtaining over 30% listings market share in multi-store physical retail store networks nationwide. With substantial product inventories on hand, new product formats coming to market as planned, a captive sales force driving increased demand through physical retail stores and increasing internal and channel efficiencies, we believe based on market conditions today that we will attain significant and sustainable market share of the Canadian recreational market.”

Canopy Growth Corp’s cash and cash equivalents totaled $429.4 million as at September 30, 2018, representing an increase of $106.8 million from March 31, 2018, principally due to the issuance of $600 million in convertible notes in the first quarter, offset by investment in the expansion of its production assets, strengthening corporate capabilities, brand-related campaigns and the establishment of physical retail stores in Newfoundland & Labrador, Manitoba and Saskatchewan. Additionally, the Company held inventory of 31,214 kilograms of dry cannabis, 21,499 liters of cannabis oils, ranging from concentrated resins, or refined oil, to finished oil, and 1,497 kilograms of Softgel capsules.

Post the announcement, Canopy Growth Corp’s stock price slumped 11% to close at C$45.10 as the revenue growth didn’t meet analysts’ expectations. Canopy Growth stock trades at a market capitalization of C$15.6 billion with a price-to-book ratio of 8.0x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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