Canopy Growth (NYSE:CGC) stock has some big problems. There is no growth at this marijuana company. Net revenue fell to $90.5 million CAD for its June quarter, down from the prior-quarter revenue of $94.1 million CAD.
What’s more is that CGC’s adjusted free cash flow losses widened from the prior two quarters. FCF came in at a loss of $372 million CAD in the latest quarter. This is about even with the prior quarter’s loss of $373 million CAD.
But after including acquisitions, the adjusted FCF widened to loss of $824 million CAD from a loss of $414 million CAD. This is an increase in adjusted-FCF losses of 99%.
CGC stock won’t be rising anytime soon with these kinds of losses. For example, CGC’s cash and securities balance fell 30% in the most recent quarter to $3.1 billion CAD. If Canopy Growth keeps draining its cash as it did last quarter, CGC stock will keep falling.
Two months ago, I wrote that ex-CEO Bruce Linton told Bloomberg that CGC’s goal was to reach $1 billion CAD in sales by March 2020. With sales falling like it did this past quarter, $1 billion CAD in sales won’t be reached anytime soon.
What Happened to CGC Stock?
Recreational cannabis revenue, the biggest portion of CGC’s revenue, fell 11% from $68.9 million CAD to $61 million CAD. Even though medical and international sales rose during the quarter, total gross revenue fell 2.9%.
More disturbing is the fact that total sales in volume terms (kilograms and equivalents) rose 13%. Total sales volume was 10,549 kilograms and equivalents in the latest quarter against 9,326 kilograms in the prior quarter. But comparing the June quarter with the December quarter, volume increased only 4.4%.
So that means the effective cannabis price fell this quarter. You can’t keep selling 13% more product and see your gross revenue fall by 2.9%. That is a losing proposition. It also does not augur well for the future of the cannabis industry. In effect, demand was tepid and prices fell.
So what does the future look like for CGC stock?
Stay Wary Until Demand Shows Up
Canopy Growth stock can survive for the time being since it has $3.1 billion CAD in cash and securities. But in the past six months, CGC has bled out $1.7 billion CAD of its cash and securities balance.
Most of that money was received when Constellation Brands (NYSE:STZ) invested $5 billion CAD in Canopy Growth stock. It’s probably not very happy that its investment has not yet paid off.
If CGC keeps losing $824 million CAD each quarter, the $3.1 billion CAD balance will be mostly spent in the next year. CGC stock’s market value, now worth $12.9 billion CAD, will dramatically drop. Investors will anticipate the need for another capital infusion and the related dilution effect.
Canopy Growth’s Game Plan for $1 Billion in Sales
Canopy Growth needs to prove how it will reach $1 billion CAD in sales. Presumably, that is the break-even cash flow level of sales. It is going to take much longer than previously anticipated. At this pace, CGC will not achieve even half that amount by the end of March 2020.
For example, is the company depending on future markets in the U.S. to open up? Is it solely relying on the regulatory opening of the cannabis-infused edibles market next month? Analysts are calling this “Cannabis 2.0” after the 2018 nation-wide recreational market opened.
I highly suspect that is Canopy Growth’s game plan. I would wait to buy CGC stock until the company shows signs of being able to sustain itself financially after this edibles market opens up.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and was launched on August 30. Subscribers during September receive a 20% discount, plus a two-week free trial.
