Canopy Growth (NYSE:CGC) is set to release its earnings before the markets open on Feb. 14. CGC stock is likely to trade sideways unless management can show a path to profitability soon.
Analysts are expecting another quarter of losses for Canopy Growth. This will not help the company’s cash burn. It will likely mean that CGC stock will languish further. When expenses get under control and net cash outflows turn around, CGC stock will have a chance to rise.
For example, one analyst estimates that Canopy’s cash will last only eight months. This is based on its last reported cash burn rate.
But Canopy disagrees with that analysis. It includes the marketable securities on its balance sheet as available liquidity. Barron’s estimates that including those securities, CGC has 20 months of liquidity at the most recent burn rate.
CGC stock is still down over 62% from its 52-week highs. It trades at a huge price-to-sales ratio of over 22 times. That could be a price-to-earnings ratio for most normal companies.
Some analysts say that the industry’s revenue slump is partly due to inventory dumping. In effect, cannabis companies are selling more of their lower-priced weed than other products.
Oppenheimer analyst Rupesh Parikh believes there are continuing challenges in the Canadian cannabis market.
These include an underdeveloped retail footprint, the illicit market undercutting licensed producers on price and growing pains. He also thinks weaker players in the space could push prices down.
What to Expect With CGC Stock
Last quarter, Canopy produced gross revenues of 118.3 million CAD. This figure was up 6% over the prior quarter. However, after restructuring charges, net revenue came in at just 76.6 million CAD, down 15%.
Canopy has not provided any guidance for its revenues for the third fiscal quarter which ended Dec. 31, 2019. However, revenue is likely to be down this quarter on a net basis after further restructuring charges. So far this fiscal year, CGC has adjusted for returns and pricing every quarter.
In addition, the inventory blowout effect, where it sells lower-priced weed, is likely to be a factor this quarter.
Former Constellation Brands (NYSE:STZ, NYSE:STZ.B) executive David Klein took over as chief executive officer on Jan. 14. Constellation owns approximately 30.8% of Canopy’s stock and has warrants that effectively allow it to take control.
There is a huge short interest in CGC stock, as I previously pointed out. These investors win by having the stock fall.
Canopy Growth must show a path to profits before the stock will likely take off.
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. Subscribers receive a two-week free trial.