Investors reacted swiftly and angrily when Canopy Growth (NYSE:CGC) reported quarterly results. The company’s revenue grew by just 14.7% while losses worsened by 243.3% to 1.303 Canadian dollars ($970 million). Is CGC stock still the leading cannabis firm?
After the weak results, the company has more to prove to its investors.
CGC Stock Hurt by Q4 Results
Canopy Growth’s loss widened when the company took an impairment and restructuring charge of CA$743 million. Though the majority of them were non-cash charges, the negative 85% gross margins in the fourth quarter of fiscal 2020 weighed on investors. Shareholders need to wait again for the company to reach profitability.
CEO David Klein tried to resonate with a positive tone. He said that during the Covid-19 pandemic, “our team has rolled out our exciting new cannabis-infused beverages and vape products in Canada and a portfolio of CBD products in the US.”
Canopy still has a weak demand problem and too high a capacity.
The non-cash write-down is a potential bright spot for the company. Despite that out of the way, market selling pressure may play out in the near term. But before the next quarterly earnings report, speculators who waited years for a better entry point have another chance.
Risks of CGC Stock
Cannabis firms are generally risky plays because they are still unprofitable and have no moat. In the past quarter, Canopy and its competitors touted “Cannabis 2.0” or edibles and oils as the next catalyst for growth. The dry flower is more likely to remain as the core product its customers want.
Canopy’s refocused strategic plan adds some near-term uncertainties for investors. The company completed its review and reiterated the full support of its board of directors and Constellation Brands, its largest investor.
Canopy Plans to Reorganize
Unsurprisingly, Canopy outlined a restructured organization that turns its focus on three core markets: Canada, the U.S. and Germany. It already cut staff, sold unnecessary assets, and exited non-core markets. Continued research and development spending will ensure its long-term business health.
Klein acknowledged the company’s faults.
“Over the past few quarters, we’ve been slow to react to changing market dynamics and consumer preference shifts in the developing markets in which we participate. It’s my intent to ensure that we don’t repeat those mistakes going forward.”
Canopy is still forecasting strong demand from its existing legal customers. But it faces two main headwinds: competitors and the illicit markets. The good news is that the company is “building world-class consumer insights and analytics capabilities.” The bad news is that leading this function is the hiring of a chief insights officer.
As long as the executive hiring does not add to unnecessary layers, the initiative should pay off.
Opportunity in the U.S.
The U.S. continues to be a lucrative opportunity for Canopy worth $10 billion. The company expanded its product line with the First & Free product CBD brands. In the next few months, it will add even more products and brands.
If it is the best ingestible, its CBD product could gain the most market share in the region. Its sports nutrition company, BioSteel, is another potential catalyst. There, Canopy added CBD to help recovery in athletes.
First & Free topicals, which targets the skincare and topics market in the U.S., is the biggest category. Still, Canopy acknowledged “that’s an area that will be a little more challenging for us and take us a little longer in order to really establish a toehold because there are some sizable and well recognized competitors.”
The Bottom Line on CGC Stock
Canopy is still a growth play, but speculators should exercise caution. If demand picks up and costs keep falling, this company may reward investors.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities. Follow Chris on Twitter.