Should Investors Reset Expectations for Canopy Growth?

Why was the market spooked?

After Canopy Growth’s (WEED)(CGC) earnings, investors got spooked and hit the sell button. The third quarter ending December 31, 2018, was the very first quarter to partially reflect the potential for recreational cannabis sales for cannabis companies after legalized recreational cannabis went on sale officially in Canada on October 17. We say “partially” because the month of October included sales only from October 17 onward. With expectations for huge sales volumes for recreational cannabis in the fourth quarter, the anticipation that Canopy Growth (WEED) (CGC) would impress investors was high.

Investors expected Canopy Growth to report higher sales in kilograms and kilogram equivalents in the fourth quarter ending March 31, 2019, compared to the third quarter. The higher expectations were because by the fourth quarter, Canopy Growth’s earnings would include additional days but also because the company would have further established its sales and supply channel to sell more to the market. However, things did not go as expected.

Falling short on a performance metric

In its Q4 2019 earnings release, Canopy Growth (WEED) (CGC) reported a total of 9,326 kilograms and kilogram equivalents of cannabis sold. This was almost 7.6% lower than what the company sold in the previous Q3 2019 quarter. Out of this total figure, the company’s recreational cannabis sale declined by 3.9% quarter-over-quarter to 7,963 kilograms and kilogram equivalents from 8,287 kilograms and kilogram equivalents.

The company experienced an even steeper drop of 23.4% quarter-over-quarter at 1,233 kilograms and kilogram equivalents in medical cannabis sales in Canada compared to 1,611 kilograms and kilogram equivalents. According to the company, the decline in kilograms sold was due to a shift in product mix.

At the same time, Canopy Growth’s sales grew 13% quarter-over-quarter. Similarly, its peer Cronos Group’s (CRON) sales grew by 15%, Aurora Cannabis’s (ACB) sales grew by 20%, and Tilray’s (TLRY) revenue grew by 48% quarter-over-quarter. Note that these are percentages, and for some of these companies, the dollar sales amount is much larger than others. For example, Canopy Growth’s dollar sales in the fourth quarter were 94 million Canadian dollars, while Cronos Group’s sales were at just about 6 million Canadian dollars.