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Buy the Dip on Canopy Growth Stock Following Mixed Q4 Results

Canopy stock is retreating which only makes buying it now cheaper

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.

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.

However, that doesn’t cover the entire business, which will likely continue to lose money for the foreseeable future. I’d label this as negative but leaning toward nothing to see. Investors understand that the global cannabis business is still in its infancy; money has to be spent to build the infrastructure to support a global enterprise.        

Canopy finished the fourth quarter with C$3.7 billion in net cash or 26% of its market cap. Solvency is not an issue.     

I don’t think there’s anything in the latest quarterly report that should make long-time shareholders head for the exits. The company has a lot of moving parts and many different projects going on at the moment.

Have you ever heard of Storz & Bickel, the company’s Germany-based vaporizer devices acquisition it made in the third quarter for 145 million euros? I sure hadn’t. It, along with other strategic investments, generated C$34 million in revenue in the past fiscal year. There’s a lot more to digest about the report than just the top- and bottom-line.  

Now, if you bought as a speculative play when it severely corrected last December, it wouldn’t be the worst thing taking profits off the table. Who knows? You might be able to buy in the mid-$30s in no time.

Buy Canopy Growth Stock on the Dip?

As long as the markets keep on this momentum train, I’m not sure investors will get a much better entry point than after this slight dip due to earnings.

In a week or two, people will have forgotten about the losses and will be focusing on what’s new with edibles — they’ll be out in mid-December in Canada on a limited basis with a broader rollout in 2020 — and all the other exciting products it’s developing for Canada and elsewhere.

If you buy on this dip and it drops even further into the $30s, I’d buy some more, but only if you believe, as I do, that Canopy Growth will become one of the most prominent players in the global cannabis industry.

For those who don’t like risk, CGC stock isn’t a sure thing. Until it starts making money, you might want to pass.

At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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