Canopy Growth (NYSE:CGC) is having growing pains. Canada’s largest cannabis producer posted a $1.28 billion CAN loss (~$960 million) in their fiscal 2020 first quarter. The more disturbing issue for investors in CGC stock was a 4% loss in net revenue from their previous quarter. Analysts were expecting a 17% increase.
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Whenever a company misses so badly on earnings, it’s natural for investors to ask what happened. In the case of Canopy, the company clearly misjudged the market for their cannabis oil and softgel products. Was Canopy doing a little bit of channel stuffing? I’ll leave that for others to decide. But it’s clear that Canopy made a miscalculation of the demand for these products.
Another cause for concern is that the company is still looking for a new CEO. After disappointing fourth quarter fiscal 2019 results, Canopy’s board, with a push from big stakeholder Constellation Brands (NYSE:STX), showed CGC founder and former CEO Bruce Linton the door. That vacuum in leadership is more disturbing when investors digest the fact that interim CEO Mark Zekulin is reporting he will leave the company once a suitable replacement is found.
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Can Results Match the Optimistic Rhetoric?
Fundamentals matter. Investors are punishing CGC stock and demanding to see at least a path to future profits. On this score, Zekulin is making big promises on his way out the door. In the conference call to report their disappointing earnings, Zekulin reaffirmed that CGC will reach a $1 billion CAN annualized revenue run rate by the end of its current fiscal year. More importantly, Zekulin said the company will deliver a positive adjusted EBITDA on a quarterly basis at some point in their 2021 fiscal year. This would be one step in Canopy ultimately achieving elusive profitability within the next three to five years.
Canopy is Leading a Viable Emerging Market
Despite all the negative news, Canopy is a leader in a viable emerging market. For that reason, I believe the current trouble for CGC stock is merely “growing pains.” Cannabis continues to change the way many Americans are thinking about conventional medicine. For evidence of this, investors need to look no further than Florida. The legal cannabis market is growing faster there than almost any other state in the country. From April 2018 to April 2019, the number of licensed dispensaries nearly tripled. And the number of registered patients has almost quadrupled since the beginning of 2018.