No matter how bullish or bearish this article gets, chances are low that cannabis stocks will stage any near-term rebound. The bearishness for the sector grew throughout the year and may have potentially capitulated in the last week. Tilray (NASDAQ:TLRY) and Cronos Group (NASDAQ:CRON) soured the sector after reporting quarterly earnings. Yet, as a widely watched cannabis firm, Canopy Growth (NYSE:CGC) deserves a closer look. Why is CGC stock trading at 52-week lows?
Canopy reported Q2 2020 losses of 1.08 CAD (81 cents) a share. Its revenue grew a solid 228.8% year-on-year to 76.6 million CAD ($57.5 million). Sadly, both figures missed consensus estimates by a wide margin of 73 cents CAD and 29.1 million CAD, respectively. The $58 million CAD quarterly revenue from the largest cannabis firm in the world is a disappointment.
Canopy Growth stock will not rally on hope anymore. Fundamentals now take center stage. That suggests that the talk of Cannabis 2.0 (edibles, vaping and oils) holds only promises and hope for investors who bought CGC stock earlier this year.
Addressable Market Halved
To accelerate sales, Canopy Growth needs more storefront approvals from Canadian authorities. The company describes itself as a global cannabis firm chasing an opportunity worth hundreds of billions of dollars. It targets the medical, pharmaceutical, CBD, and recreational cannabis markets. Canada is the first national federally legal large-scale market to execute upon. But as investors now realize, management noted on its conference call that the market opportunity is not living up to expectations. It said that the Ontario government failed to license retail stores right off the bat. This cut the addressable market in half.
Canopy Growth now faces excess inventories and competes against the illicit cannabis market on price and on supply. Cannabis 2.0 product launches will follow. For investors, the same problem remains: the stock, with a $6.17 billion market capitalization, is over-valued relative to annual sales.
Higher Shipments in Quarter
Canopy had strong product inventory to drive shipments of dry flower and pre-rolled joints across its Canadian recreation channels. Dry bud shipments grew 12% Q/Q. Sales grew 17% overall, while retail sales grew 24% to 13.1 million CAD. Its medical cannabis business grew just 8% in Canada while internationally, the business grew by 72%. Canopy’s overall organic sales grew a solid 23%. Oil and soft gels now represent more than half of its global medical business. This is a positive trend that will offset some of the near-term challenges the company faces.
The 2.0 market is an opportunity that the company will target next. This includes distilled cannabis, non-active versions of chocolate and beverages that Canopy Growth plans to bring to market.
CBD Market Expansion
Canopy will launch its CBD business in South Africa in the coming months. In the United States, it invested in hemp cultivation. By the end of its fiscal year, the company will launch skincare cosmetics, therapeutic creams, beverages, oil, soft gels, and beverages in the U.S. Canopy’s partnership with Acreage Holdings is progressing. Within this fiscal year, the partnership will result in the launch of three branded cannabis products in multiple U.S. States.
In Europe, its Danish greenhouse received GMP certification. So, by Q1 2021, the facility will serve the European markets.
Revised Outlook Tanked CGC Stock
Canopy originally targeted a $250 million quarterly revenue level by the fourth quarter of fiscal 2020. And even though it has the capacity, sales efforts, and inventories to meet that target, the company does not have enough points of retail to meet that target. This forecast sent CGC stock down by 29% last week.
The delays due to government approval forced Canopy to write down 8 million CAD of its gross revenue. It took another 32.7 million CAD in revenue provisions. A new pricing architecture, probably due to competition from the illicit market, returns from provinces due to slow-moving products and obsolete products contributed to this revenue loss.
Your Takeaway on Canopy Stock
Heightening uncertainties sent Canopy stock to new yearly lows. As the trading season approaches, tax-loss selling, negative pressures on CGC stock will persist. The cannabis market is in correction mode for now. Timing the turnaround is impossible, even though it will eventually come. The potential for outsized growth is dependent on the government approving more store openings. Continue watching the sector while holding a smaller position for now.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.