As the cannabis sector continues to push forward, or should we say fall down, earnings season has arrived once again. So far, we have seen mid-cap licensed producers, like Aphria and OrganiGram, report decent earnings.
Next up is Canopy Growth (CGC), which is set to report their Q3 earnings this Friday, on Valentine’s day, before the market opens. One analyst in particular is not too optimistic regarding Canopy Growth’s quarter. MKM Partners analyst Bill Kirk said that he expects no holiday love for the report. Kirk said the report will be “fraught with risk.”
Kirk wrote in a note on Monday that he doesn’t expect the results, for the Canadian marijuana company’s fiscal third quarter, to show much additional revenue from Cannabis 2.0 products, which include vapes, edibles, and beverages.
Many investors were hoping that the new 2.0 products that were finally made legal for sale in Canada in mid-December would generate new streams of revenues along with better margins. Cannabis companies were hoping to start selling vapes and beverages last year, but Canopy Growth recently delayed its launch into later in 2020. Although this quarter Cannabis 2.0 products will probably not contribute to revenue, Kirk expects the results could show new costs associated due to ramping up production of these products.
One of the biggest concerns for Canopy Growth and other cannabis companies is the bottleneck in the province of Ontario. Kirk points out that Ontario, one of Canada’s most populous provinces, is still far behind even the smaller provinces in terms of stores opened.
In a recent article, it was said that Ontario, a province of over 14 million people had only 28 stores open. Meanwhile Alberta, a province of 4 million, had 402 stores. The lack of stores has hurt revenues for large cannabis companies. Canopy Growth has mentioned that stores could open as fast as 40 a month, starting in January. Ontario hasn’t achieved that pace yet or committed to do so, Kirk said.
When it comes to Canopy Growth’s earnings estimates Kirk expects Canopy Growth to fall short of investors’ expectations for both revenue and adjusted earnings before interest, taxes, depreciation, and amortization. Wall Street estimates that the company will have revenue of 105 million Canadian dollars (US$78.8 million) and adjusted Ebitda of negative C$113 million.
Right now with things so uncertain in the cannabis sector, we are taking a wait and see approach to investing and will wait until the retail environment improves before becoming more optimistic.
So keep a close watch on Canopy Growth on Friday. Their earnings release will not only move the stock but will likely move the cannabis market as a whole.
CGC shares were trading at $19.59 per share on Wednesday afternoon, down $0.32 (-1.61%). Year-to-date, CGC has declined -7.11%, versus a 4.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...