Canopy Growth Corporation (NASDAQ: CGC) is close to breaking out above the $45 level after bouncing off the sub-$40 low at the start of June. The market will look to the CGC stock fourth-quarter earnings report after the market close on June 20 before making the next big move. What will Canopy’s earnings report look like? Should investors look beyond the quarterly results and stay on course for at least the next few years?
Fourth-Quarter Earnings Expectations
Analysts expect CGC stock will report a loss per share of 17 cents — compared to last quarters earnings per share of 22 cents CAD ( approximately 17 U.S. cents). This despite a forecasted threefold revenue increase to $90.1 million CAD from the year ago quarter, and a 9% increase from Q3’s $83 million CAD.
Since the company’s EPS gain in the last quarter was due mostly to accounting, however, investors should turn their attention to its revenue, EBITDA, and other expenses. For example, other expenses in Q3 included Canopy’s share-based compensation more than tripling from CAD $17.8 million to CAD $63.9 million YoY. Its EBITDA loss is mostly due to the temporary nature of the non-producing facilities in the period. Plus, the absorption of the medical excise tax to support customers also contributed to the EBITDA loss.
Canopy Expanding Production
Investors are well aware of Canopy’s costs related to expanding its facilities to increase production. In Q3, it harvested 7,556 kilograms, which is down from last year, partly due to adjusting for a year-round harvest. Canopy also underwent greenhouse setups and early pilot private harvest in Mirabel in the quarter.
Canopy’s cash balance surged to CAD $4.9 billion due mostly to Constellation Brands’ (NYSE: STZ) November 2018 investment and an aggregate CAD $500 million convertible notes offering. Canopy used the cash to fund operations and for investments and facility enhancements that totaled CAD $568 million year-to-date.
Canopy ramped up inventory and biological assets by 100% year-over-year to CAD $185 million. In normal circumstances, an inventory build-up is a negative development. But for Canopy, management is deliberately increasing it so it may meet future expected increases in demand. The company expects both legalization in the recreational market and medical customers choosing Canopy’s product to drive demand.
Acreage Holdings Acquisition Approved
Canopy announced on June 19 that its shareholders voted overwhelmingly to approve the acquisition of Acreage Holdings (OTCMKTS:ACRGF). In a move towards becoming more of a global company, Canopy will start with growing its footprint in the U.S. with this acquisition — contingent upon the U.S legalizing marijuana at the federal level. In this even, CGC gains an active owned or contracted hemp operations in seven states. The seven states are California, Colorado, Kentucky, New York, North Carolina, Oregon, and Pennsylvania. With planting now underway, the mixture of high-CBD varieties and high-fibre genetics may supply the raw material necessary for the large-scale production of hemp-based products.
Once Canopy reaches full capacity, it will have American farmers contracted to cover over 4000 acres. Half of the farming platform will be located in New York State with high-CBD hemp and high fibre hemp growth making up much of the production.
When Canopy’s facilities are all up and running, investors should expect continued improvements in yields and utilization. CGC stock’s quarterly earnings report will start showing better margins as yields increase. In the short term, which includes results from the upcoming earnings report, expect costs exceeding revenue. Margins will not get to the mid-50 range for another five to seven quarters. The company is implementing a business plan that is not about selling medical marijuana alone. It is now selling a product based on the outcome of cannabinoid therapy. And studies and various trials validating those therapies take time.
Valuation on CGC Stock and Your Takeaway
Analysts are highly bullish on Canopy Growth stock. 11 analysts have an average price target of $80, which represents a potential return of 87% based on a recent closing price of $42.77.
CGC stock will need to continue growing revenue at a 300% year-over-year pace to justify a $20 billion valuation. If its yields increase in the next few quarters, then the positive earnings will validate Constellation Brands’ big $4 billion bet on the company.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.