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Canopy Growth: Is $1 Billion in Sales Still Possible?


Oct. 25 2019, Published 7:34 a.m. ET

Canopy Growth (CGC) (WEED) is one of the prominent players in the cannabis industry. The markets expected that the company could reach 1 billion Canadian dollars in sales for fiscal 2020. Due to headwinds in the cannabis industry, can we still expect the company to deliver such high sales?

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Canopy Growth’s revenue estimate

Canopy Growth reported disappointing results in the first quarter of fiscal 2020. The expectations in fiscal 2020 don’t look positive either. Analysts expect Canopy Growth to achieve sales of 0.54 billion Canadian dollars in fiscal 2020—a huge step down in the estimates. The target for 1 billion Canadian dollars in sales moved to fiscal 2021. Currently, analysts expect Canopy Growth’s fiscal 2021 revenues to be around 0.99 billion Canadian dollars, which doesn’t paint a good picture of the company.

Recently, many analysts cut their target price for Canopy Growth and other cannabis stocks. The cannabis industry might report lower revenues in fiscal 2020. HEXO withdrew its fiscal 2020 outlook and reported lower preliminary fourth-quarter results. The preliminary results confirmed that there’s trouble in the cannabis space.

Barron’s report discussed BMO analyst Tamy Chen’s expectations for the cannabis sector. Chen doesn’t see accelerated growth in the cannabis sector until the second quarter of 2020. She also said that the cannabis sector will likely report negative cash flows due to lower sales. The expansion after Cannabis 2.0 could also show results later next year. Chen expects Canopy Growth to report revenues of around 114.8 million Canadian dollars in the second quarter of 2020.

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What caused doubts about Canopy Growth?

In the first quarter of 2020, Canopy Growth reported net revenues of 90.5 million Canadian dollars—lower than net revenues of 226 million Canadian dollars in the fourth quarter. Sequentially, the company’s revenues fell 59%, which raised doubts about why the revenues slowed down. Also, a negative EBITDA of 92 million showed that the company’s operational costs were higher.

When we breakdown the company’s performance in the first quarter of fiscal 2020, you will notice that it reported sales of 10,549 kilograms per kilogram equivalents, which is an increase of 291% YoY and 13% sequentially. Breaking this down more, the amount includes 7,673 kilograms of dry recreational cannabis and 1,387 kilograms of the soft gel format. Canopy Growth also sold 807 kilograms of dried medical marijuana and 682 kilograms of the soft gel and oil format.

So, the increase is obvious. However, will that be enough for the company to hit the 1 billion target for the fiscal year? We’ll have to see what rate the company increased its sales in three quarters in fiscal 2020. Piper Jaffray analyst Michael Lavery questioned Canopy Growth’s management about the increase in the company’s earnings call for the first quarter of fiscal 2020. CEO Mark Zekulin said that the company should still be able to hit 1 billion Canadian dollars in sales. However, he thinks that a major chunk of the sales will be from the Canadian market. Macro conditions allow new product formats to generate revenues. He also thinks that Canopy Growth is placed well in the industry with its strong cash position.

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Is $1 billion in sales still possible?

Analysts’ revenue estimates for all of the quarters in fiscal 2020 are as follows:

  • The revenues in the second quarter of fiscal 2020 could be around 114.7 million Canadian dollars.
  • Canopy Growth’s revenues in the third quarter of fiscal 2020 could be around 136.1 million Canadian dollars.
  • The revenues in the fourth quarter of fiscal 2020 could be around 201.4 million Canadian dollars.

Meanwhile, Aurora Cannabis (ACB) could report 540.9 million Canadian dollars in revenues in fiscal 2020. Aphria (APHA) could report revenues of 595.9 million Canadian dollars in fiscal 2020. HEXO (HEXO) could report revenues of 140 million Canadian dollars in fiscal 2020. The company rescheduled its fourth-quarter earnings for October 28.

Chen’s expectations for cannabis players’ revenues are as follows:

  • Aurora Cannabis’s revenues will likely be around 111.0 million Canadian dollars in the first quarter of 2020.
  • Hexo’s revenues will likely be around 15 million Canadian dollars in the fourth quarter.
  • Aphria’s revenues will likely be around 133 million Canadian dollars in the first quarter of 2020.

So, we won’t know until the fourth quarter of fiscal 2020 if Canopy Growth manages to increase its revenues. We don’t know how the cannabis edibles market will turn out. Despite analysts’ estimates for Canopy Growth and the cannabis industry as a whole, the company is still pretty confident that it will be able to achieve a $1 billion run rate by the end of the fourth quarter of fiscal 2020. Canopy Growth is also optimistic about achieving a positive adjusted EBITDA on a sequential basis in fiscal 2021.

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Will Cannabis 2.0 help Canopy Growth?

In the first-quarter earnings call, Canopy Growth’s management mentioned how brands and new product formats are a priority. Developing unique and high margin cannabis consumer products will help drive the overall size of Canada’s recreational cannabis market. Canopy Growth also thinks that it has the resources to develop better vape products. The company will launch 15 new SKUs related to its new vape technologies in December.

The company will launch multiple cannabis beverage products with Constellation Brands (STZ). We’ll have more details on the products by the third quarter of 2020. Canopy Growth will also introduce chocolate products. To learn more about Canopy Growth and Aurora Cannabis’s expansion plans for Cannabis 2.0, read Cannabis 2.0: Aurora versus Canopy Growth.

Vaping concerns have made consumers anxious. Bruce Linton, Canopy Growth’s ex-CEO, was happy with the successful launch of Cannabis 2.0. He thinks that regulated and safe products are more important. He said, “When people go to stores they can buy vapes that are tested not to contain Vitamin E or pesticides or things like that. They’ll be able to buy beverages.”

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With the market for vape products evolving, it’s essential to have quality vaping devices to address health concerns. Despite booking losses in the recent quarter, Constellation Brands is confident that Canopy Growth will reach 1 billion Canadian dollars in sales in the next 18 months, as stated in its January earnings call. Canopy Growth will report its results for the second quarter of fiscal 2020 next month. Stay with us for more about the company’s growth strategies.

Other threats in the cannabis industry

Currently, the black market and illegal cannabis sales are the biggest threat to cannabis companies. As a result, cannabis players are losing out on revenues. To learn more, read Cannabis Stocks’ Dilemma: Rising Black Market Sales. Stricter regulations in Canada will help tackle black market sales. Meanwhile, US states that have legalized cannabis are still struggling due to federal regulations and corruption in obtaining licenses. However, marijuana legalization is picking up steam again. Presidential candidates have talked about cannabis legalization.

For more cannabis-related news and updates, visit 420 Investor Daily.


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