Cannabis Earnings: Top Three Things to Consider


Jan. 11 2020, Updated 12:53 p.m. ET

Next week, several top cannabis companies are reporting their earnings results. Investors will closely watch for what numbers the companies announce. After all, the expectation for cannabis companies to do well is riding high. Consequently, next week’s earnings releases will also set the path for cannabis stocks moving forward. So let’s break down the top three things to look out for.

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Revenue drivers

We’ll closely watch for the top-line performance from cannabis companies next week. In effect, we want to see how revenues grew. So we’ll be looking for the revenue drivers. These drivers will include growth in both the recreational and medical segments.

Lately, recreational cannabis segments have dampened analysts’ outlook. So next week’s earnings will serve as a validation point for some future expectations.

Plus, we’ll also keep an eye on the companies’ revenue mix. For example, we want to understand how prices have kept up. Sales volumes will also help us understand the demand for cannabis products.

The profitability game

Profitability is the end goal for investors. Unfortunately, cannabis companies have failed to become profitable in recent quarters. In addition, with a subdued outlook, the timeline for future profitability looks questionable.

This uncertainty is due to upfront expansion costs for these companies. For example, Canopy Growth (WEED)(CGC) has spent heavily on expanding its business, and this trend has weighed on the company’s profits.

On the other hand, Aurora Cannabis (ACB) has funded its growth using debt. As a result, its risk-to-equity multiple increases when Aurora fails to turn profitable quickly.

How analysts react to cannabis earnings

Analysts’ reaction is the third thing investors should consider when cannabis companies report their earnings results. Wall Street analysts will revise their outlook and ratings for the cannabis stocks in their coverage. We may also see analysts revise their price targets for these companies following new information from the earnings results.

Usually, when a consensus analyst downgrades a stock, it means the company isn’t expected to meet previous expectations. As a result, the stock may face heavy selling, and this trend could further affect an investor’s returns.

To keep updated on analysts’ ratings and price targets, visit our Word on the Street page after next week’s earnings announcements.


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