Canopy Growth Continues to Tank After Another Ugly Quarter
Canopy Growth, the world’s largest legal marajuana producing company, has been in freefall since firing their CEO earlier this year. The freefall continues to accelerate.
Canadian marajuana producer Canopy Growth remains in serious trouble, and one look at their chart says it all. Just seeing a stock drop from around $50 last April to barely able to keep its head above the $15 a share mark should scare us plenty enough, but when we look at the company’s fundamentals, a much darker story becomes told.
It’s hard to imagine anything that much darker than losing 70% of the value of your stock in just 7 months, but Canopy’s quarterly reports have indeed been even uglier than this would suggest, and we’re left wondering how this stock is doing as well as it has throughout all this turmoil.
The first thing to notice is how the company’s revenue has been declining. For a company that isn’t profitable yet, investors at least want to see revenue growth, even if losses increase. In the first quarter, analysts were expecting a 17% growth in revenue, and ended up seeing a 4% decline.
In the results for Q2, which just came out, revenue dropped 15% more compared to last quarter, coming in at just $57.8 million. This has the company bringing in about $125 million for the first two quarters, and although this is a big disappointment, it is not what is so scary about all of this.
What should stand our hair on end is the fact that, so far, the company has lost about $1.25 billon in the two quarters alone. When you take in $125 million and lose $1.25 billion in 6 months, it is hard to even come up with words that can describe how bad this is.
It does not even matter how this could happen, and companies will always seek out excuses. This time they are pointing to things like inventory returns, as their products haven’t been selling as well as they should and to the point where they are being returned to the company.
When this sort of thing makes it in to quarterly reports, and is held to blame for a bad quarter, you know that we cannot be speaking of small amounts. This all involves Canopy’s struggling oil and softgel line, where $25 million of inventory was returned to them last quarter. This isn’t a loss of this much, it just means that they need to write down their margins on this product for now, which only amounted to $12 million.
The company lost $282 million during the quarter, so this write down only explains a small part of this. The write down itself only corrected past sales that ended up exceeding the demand for these products, so this functions more like a revision than a write down.
Q1’s losses of almost a billion dollars was bad enough, and much of that was what we could term organic losses as well, and there were obviously some write downs in that quarter, as it’s not possible to take in $90 million and lose a billion in a quarter without something unusual going on. Canopy explained this one in part due to their ramping up operations, but when you spend this much, we may expect growth in sales, not a further decline.
While Canada’s legal cannabis industry is a little over a year old, we have had a year to see the market grow, and this is by no means an emerging market. It emerged on day one, and sales have actually declined, not increased, since it was rolled out. The stores are losing money, the companies are losing money, everyone is losing on this so far.
We Should Not Get our Hopes Up Too High with Cannabis 2.0
There is one potential bright spot, which is the coming of edibles and vape pens, and while this may help boost sales, it’s hard to imagine this being big enough to plug the huge hole in the boats of Canadian cannabis companies, especially ones as large as Canopy’s.
It does seem like these companies may be overestimating what is being called Cannabis 2.0 though, and they certainly overestimated the demand with Cannabis 1.0, the original roll out. The governments committed the same mistake though and cannabis retail is struggling right alongside the producers.
Legal cannabis hasn’t quite taken over from illegal distribution, and in spite of both the producers and the stores losing money, illegal cannabis remains very much competitive to the legally purchased product. This is not a problem that seems to be going away, and this is not a market that is going to be expanding very much even with the new ways to ingest that will be offered, because it can be reasonably assumed that those who desire cannabis would have mostly already found a delivery method that they are comfortable with, whether that be smoking the dry product, or ingesting oil.
There is also the issue of rogue cannabis vaping pens being contaminated with Vitamin E, which is healthy to ingest but deadly when inhaled. The company and the industry are going all out to educate consumers about this and assure them that the product is safe, although the hysteria surrounding this has even spilled into the nicotine vaping realm and this crisis has nothing to do with this product at all, yet this has impacted sales.
Having the government reassure people will help though, especially explaining to people the nature of this risk along with the fact that these products certainly will not contain Vitamin E or any additives in fact, and this could end up helping both the cannabis and nicotine vaping markets in Canada at least.
Edibles should be pretty popular although this may be expected to mostly cannibalize existing sales, and while there may be people who may object to smoking it, objecting to ingesting it in capsules or by way of a dropper but being comfortable with edibles does not represent much new business.
There may be a missed opportunity though in promoting the consumables that they have now, as this is a fairly new product where smoked marajuana is the incumbent. The market for consumables will expand as more and more people get familiar with it. All the hoopla about this new wave of products may help, but once again, we’re just substituting one product for another when people migrate to different forms.
With the Company Getting Gutted and Little Hope on the Horizon, Hold on Tight
The big prize is legalization in the United States, however Canadian companies need this to happen at the federal and not just the state level to be able to export their products into the U.S. This is not something we may expect anytime soon as the level of resistance at the federal level to legal cannabis is strong and enduring even though more and more states are legalizing it.
When you get banned for life from entering the U.S. merely by admitting at the border that you have used legal cannabis at one time, you know that the wall is very high. Getting federal approval is a long way away indeed, even though it may not be so far in our dreams.
Given that there’s nothing really on the table now, buying a stock like Canopy Growth with the expectation that they will expand into the very potentially lucrative U.S. market is way too premature. If and when this happens, you can bet that the competition for this market will be fierce, and Canadian cannabis companies will be at a disadvantage due to their needing to have their products subject to import duties.
The competition in Canada is fierce enough, and this is at least one of the reasons why the industry is struggling as much as it is. They are not only competing with each other, they are competing with the illegal cannabis market as well as the medical marajuana dispensaries, who have lower price points and many offer easy access to the required prescription by teaming up with medical doctors who may even set up their offices across the street from the dispensary who hand out these prescriptions just by asking.
A big part of the problem is the extra tax that is added to legal cannabis products, and it is high enough that the premium added to illegal weed to compensate people for the risk of going to jail is often lower than what the government adds in.
Canopy Growth is not a company that anyone should be invested in right now, and things are so bad that their business results are just obscene, and deserve the same R rating as a horror movie would, with investors the target of the psychopath killer in this movie.
Canopy Growth still has a couple of billion dollars kicking around in cash, but with this much water entering the ship, we really need to wonder whether they will be around in 3 years when the company predicts it finally will be profitable.
Projecting ahead, Cannabis Growth’s cash may serve them well should things remain difficult and competitors start dropping off, where one day they may actually be able to use all the capacity that they have spent all this money on to better advantage. There will certainly be a culling, and whether or not this includes Canopy Growth remains to be seen, but this is a gruesome play right now on the long side and no one should ever want to be on a sinking ship by choice, especially one sinking this fast.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
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