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Why Analysts Seem Pessimistic about CGC’s Earnings

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Canopy Growth (CGC) is set to announce its fiscal 2020 second-quarter results on November 14. The company targets the Canadian recreational cannabis market through its production, distribution, and retail capabilities. It is also focused on opportunities in the US, Europe, and Australia. In May, the company grouped all of its medical marijuana-related research and activities under the Spectrum Therapeutics brand.

In its investor presentation, CGC reported more than 71,500 professional healthcare visits. The company accounted for 25% of the Canadian recreational marijuana market at the end of June. Bank of America Merrill Lynch calculated the share based on the company’s product listings, which surpassed those of all producers and doubled its nearest competitor’s.

Despite the company’s solid position in the cannabis sector, CGC stock is down 29.23% year-to-date on the Toronto stock exchange, and 24.45% on the New York Stock Exchange. Can CGC’s second-quarter results turn things around?

Analysts’ revenue estimates for CGC

In the second quarter, analysts now expect CGC’s revenue to rise 365.04% YoY (year-over-year) to 108.48 million Canadian dollars. Previously, they expected its revenue to rise 369% YoY to 109.5 million Canadian dollars. Analysts have also reduced their fiscal 2020 revenue estimate for CGC, to 140.39% YoY growth to 544.10 million Canadian dollars from their previous estimate of 544.57 million Canadian dollars. These estimates are much lower than CGC’s fiscal 2020 revenue guidance of 1 billion Canadian dollars.

MKM Partners’ and Cowen’s forecasts

Yesterday, MarketWatch reported MKM Partners analyst Bill Kirk had reduced his CGC second-quarter revenue estimate, to 95.4 million Canadian dollars from 114.5 million Canadian dollars. Kirk explained that pricing has continued to pressure the company’s revenue growth, and he thinks the company’s shipments were lower in the second quarter based on provinces’ inventories. The analyst also cited the black market’s impact on CGC’s revenue growth.

MarketWatch also reported yesterday that Cowen analyst Vivien Azer thinks CGC’s revenue could be flat in the coming quarters. Azer pointed out that the company’s revenue growth has been flat since recreational marijuana was legalized in Canada. In the second quarter, she expects surplus wholesale vape oil inventories, for which the company had to make $8 million in returns, to flatten its revenue growth. However, in the third quarter, Azer expects new Canadian retail stores to boost its revenue growth. She also foresees CGC’s medical marijuana patient count rising due to CannTrust halting sales.

Analysts’ forecasts for CGC’s margins and EBITDA

In the second quarter, analysts expect CGC’s gross margin to contract by 7.36 percentage points to 20.80%. However, they foresee its gross margin expanding by 5.78 percentage points to 28.28% in fiscal 2020. CGC has guided for a 40% gross margin by the end of fiscal 2020. On November 5, The Fly reported that Cantor Fitzgerald analyst Pablo Zuanic believes the company has lost its dominant position in the Canadian medical marijuana market. He pointed out that CGC’s gross margins are narrower than peers’.

Meanwhile, analysts expect Canopy’s adjusted EBITDA to improve by 53.78% YoY to -92.90 million Canadian dollars. Their previous estimate of -92.18 million Canadian dollars implied 54.14% YoY growth. Analysts also changed their fiscal 2020 adjusted EBITDA forecast, to -320.03 million Canadian dollars from -320.18 million. Their new estimate implies a 24.54% YoY decline.

In its investor presentation, Canopy guided for positive quarterly adjusted EBITDA by the fourth quarter of fiscal 2022. The company also expects to become net income positive in the next three to five years.

CGC’s long-term growth drivers

In its investor presentation, Canopy highlighted Cannabis 2.0 legalization and the US CBD market as new growth drivers. BNN Bloomberg reports Canopy plans to launch 32 cannabis-infused products by the end of this year, and 20 more next year. The company will be entering the cannabis-infused beverage, edible, and vaping categories.

Canopy also shared in its investor presentation that it is targeting the $250 billion global CBD market. The company, which aims to enter the US CBD market in the fourth quarter, has planted 4,000 acres of low-cost, high-yield hemp and developed a contract manufacturing network. CGC plans to target the health and wellness, pet aid, sleep solution, and skin and beauty markets.

The company also highlighted its intellectual property assets in the investor presentation. The company has more than 110 patents and has filed more than 290 patent applications.

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