It’s Getting Hard to See a Road to Profitability for CGC Stock

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Canopy Growth (NYSE:CGC) has no clear path to profitability, which will put CGC stock in a rut for the foreseeable future. CGC does not even talk about a projected date when that will happen.

It's Getting Hard to See a Road to Profitability for CGC Stock

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Moreover, the company has no clear upside in its latest earnings release. Revenue was lower than the prior quarter. CGC’s EBITDA losses worsened for the quarter ending Sept. 30.

Earlier this month Constellation Brands (NYSE:STZ), Canopy Growth’s largest investor, stepped in and forced major changes.

STZ installed its own CFO, David Klein, as the CEO of Canopy, effective next month. The existing  CEO, Mark Zekulin, not only resigned as CEO, but also as a board member. That is a polite way of saying CGC fired him.

Worsening Financials and GCG Stock

You can see from the table at the right that CGC’s latest financials show a further downtrend in revenue. In addition, adjusted EBITDA actually got worse with the lower revenue.

This means that Canopy’s margins have been deteriorating. Its negative margins have been increasing due to higher permanent costs.

CGC Q3 Revenue and Adj. EBITDA

Source: Mark R. Hake, CFA

Part of the problem is that the black market accounts for 80% of all sales. The government has not allocated enough licenses to open stores.

Recent news is that a few more stores are going to open. But this will not likely help CGC to gain higher revenue in the near term.

Canopy’s financial situation is slowly degrading as well. Cash is down about 400 million CAD as of Sept. 30, 2019, to 2,736million CAD.

Canopy’s Move Into CBD Products

Canopy Growth just introduced its first CBD product, “First and Free” in the U.S. This is a hemp-derived CBD product line. CGC offers it in a variety of formats, including softgels, oil drops, and creams.

Canopy is investing in its hemp-based CBD manufacturing capabilities in preparation for the second phase of Canadian recreational cannabis.

Canopy’s rollout of its new Cannabis 2.0 products started on Dec. 16, but those products will not be on retail shelves before early January 2020.

These products include Tokyo Smoke Go, a THC-infused (10 mg in each bar) Sativa-dominant dark milk chocolate bar. Another product is Tokyo Smoke Pause, a THC-infused (10 mg/bar) indica-dominant dark milk chocolate bar. CGC also offers Tweed Bakerstreet, a THC-infused (10 mg/bar) milk chocolate bar with peppermint.

Other products include Tokyo Smoke Ease CBD chocolate. It should be on shelves in late January. Bean & Bud chocolate will follow in early February. CGC’s cannabis-infused beverages will be on shelves in early January.

CGC expects its gross margins will improve in the coming quarters. That is when all of the cultivation & processing are in use and approaching planned capacity.

The Bottom Line on CGC Stock

Investors in CGC stock are likely to have a bumpy ride over the next few quarters. I do not expect Canopy Growth stock will rise significantly until the market believes that sustained profitability is possible.

In addition, the new financial exec from STZ will help Canopy focus on profitability. I would suspect that with the addition of new product lines next year, including CBD products, CGC will start to move towards profitability.

Most institutional investors will likely wait to buy Canopy Growth stock until profitability is in sight. That is probably a good tactic to follow at this point.

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. You can review it hereThe Guide focuses on high total yield value stocks. Subscribers a two-week free trial.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/canopy-growth-stock-outlook-losses/.

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