Shares of Canada’s leading cannabis producer, Canopy Growth (NYSE:CGC), plunged Friday after the company reported dismal fourth-quarter numbers which fell far short of expectations. CGC stock is down more than 18%.
The steep drop in Canopy Growth stock makes complete sense. The quarter was bad. And it was totally unexpected.
While cannabis peers like Cronos (NASDAQ:CRON) and Aurora Cannabis (NYSE:ACB) reported strong numbers over the past month — which broadly included accelerating revenue growth and narrowing losses — Canopy’s fourth-quarter numbers were the exact opposite.
Revenues dropped 13% sequentially, and its adjusted earnings before interest, taxes, deprecation and amortization (EBITDA) loss expanded from $90 million to over $100 million.
In other words, analysts expected Canopy to report good numbers. With that in mind, CGC stock rallied more than 40% in May.
But Canopy reported bad numbers … so it makes complete sense that CGC stock plunged 20%.
Having said all that, it also makes complete sense to buy the post-earnings dip in CGC stock. Here’s why.
Near-Term Pain, Long-Term Gain
Although Canopy’s fourth-quarter numbers were not good, this looks like a situation of near-term pain, long-term gain.
That is, Canopy’s new management team is taking all the right steps to position Canopy for profitable, long-term growth — and those steps are weighing on near-term growth.
Specifically, management is reducing Canopy’s global reach in an effort to streamline geographic focus in America, Germany and Canada — the three biggest and most developed commercial cannabis markets. The company is also curbing production, downsizing the product portfolio and pivoting toward a data-driven, consumer-first approach.
In other words, Canopy is going from “growing faster” to “growing smarter.”
Naturally, that transition weighs on near-term growth. But it also positions the company to launch better products, grow margins and expand its dominance in the world’s most important cannabis markets.
So, investors shouldn’t fret the bad earnings report too much. It’s just the collateral damage of Canopy going from an aggressive, unprofitable company, to a strategic, profitable company.
Long term, the future here remains very promising.
Big Picture Trends Remain Favorable
Zooming out, Canopy still projects as the global leader in a cannabis market that will measure $50-plus billion one day.
The company still has the most resources of any cannabis company with nearly 2 billion CAD on the balance sheet. Constellation Brands (NYSE:STZ) also just injected another 250 million CAD into Canopy. This industry-leading cash pile will enable Canopy to make more growth-oriented investments than its peers, which ultimately positions the company to not only sustain, but potentially expand its leadership position in the global cannabis market.
Also, as stated earlier, management is taking all the right steps to ensure sustained leadership, too. By strategically centering the company around its biggest growth markets, leaning into data to launch new products and cutting expenses to grow profitably, management is doing exactly what needs to be done to help Canopy turn into a very big company one day.
And, perhaps most importantly, the “cannabis boom” is still alive and well. Global legal cannabis sales rose 45% in 2019. They are expected to rise roughly 40% in 2020, 30% in 2021 and 25% in 2022, behind more widespread legalization, broader retail distribution and new products.
All in all, the big-picture trends supporting Canopy Growth remain positive. As such, while the post-earnings drop in CGC makes complete sense, so does a big rebound in the coming months and years.
Bottom Line on CGC Stock
Canopy Growth’s fourth-quarter earnings report was not good. But the company still projects as the leader in a soon-to-be-huge global cannabis market.
As such, it makes sense that: 1) CGC stock dropped 20% on the earnings report, and 2) CGC stock will rebound from this selloff.
Indeed, my modeling still calls for Canopy to net $5 in earnings per share by 2030. Assuming so, I think CGC stock is fairly valued around $40 today.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long CGC.