Canopy Growth (CGC) (WEED), the largest cannabis company by market cap, has definitely seen better days. Today, the stock is down 30.82% YTD (year-to-date) on the NYSE and 37.60% on the TSE (Toronto Stock Exchange). CGC is also down 64.75% from its 52-week high of $52.74 on the NYSE.
Recently, the cannabis sector got some good news. On November 20, MarketWatch reported that the House Judiciary Committee had voted in favor of the MORE (Marijuana Opportunity Reinvestment and Expungement) bill. The bill aims to decriminalize cannabis at the federal level in the US. Subsequently, CGC jumped 15.02% to close at $20.29 on November 21. Aurora Cannabis (ACB), Cronos Group (CRON), and Aphria (APHA) also rose 18.18%, 10.92%, and 9.51%, respectively, on the day.
CGC secures new license
On November 25, Canopy Growth also announced that it had secured Health Canada’s operating and secure storage license for 150,000 square feet of beverage facility on November 22. This facility is already operational. The company finally has all the necessary licenses to target Cannabis 2.0 vape products, edibles, and beverages. It will start production of 11 cannabis-infused beverages in its first wave of production. After that, it will add to its range of beverages in the coming months.
However, none of the news had enough of an impact to maintain the short rally in cannabis stocks. Analysts have been highlighting the challenge of getting the MORE bill approved in a Republican-controlled Senate. There’s also a significant amount of uncertainty surrounding the actual materialization of the Cannabis 2.0 opportunity.
What factors could boost or drag on CGC’s price? Let’s analyze the company’s latest news releases and financial results.
FDA’s warning about CBD products could prove challenging
On November 25, the FDA issued a warning to 15 companies for Federal Food, Drug, and Cosmetic Act violations related to the sale of CBD-containing products. The agency also cited potential safety concerns, including mood swings, diarrhea, drowsiness, inter-drug interactions, and liver injury. This news has proved a big dampener for the entire cannabis industry, which has been looking forward to expanding aggressively in the CBD space.
In January 2019, CGC secured a license from the State of New York to produce and process hemp commercially. As reported by MarketWatch, the company announced plans to invest $100 million–$150 million in a hemp facility in New York. In March 2019, the company acquired AgriNextUSA to accelerate its expansion in the US hemp space. However, the recent FDA announcement put at stake not only CGC’s hemp-based investments but also the fate of Cannabis 2.0 products.
The ongoing vaping crisis has increased overall regulatory scrutiny for the cannabis industry. Centers for Disease Control and Prevention has found some evidence that indicates illicit cannabis players as the cause of this problem. However, the death toll associated with this crisis has continued to rise. Against this backdrop, regulatory agencies are bound to increase overall scrutiny for CBD products.
CGC had a disappointing second-quarter earnings performance
CGC’s fiscal 2020 second-quarter revenue of 76.61 million Canadian dollars reflected a YoY (year-over-year) rise of 229% but a sequential fall of 15%. Its revenue also came up short of the consensus estimate of 108.48 million Canadian dollars. The company’s EBITDA of -155.7 million Canadian dollars was also lower than the consensus estimate of -92.90 million Canadian dollars.
At the end of the second quarter, CGC reported cash and cash equivalents of 2.74 billion Canadian dollars on its balance sheet. Although it’s one of the cannabis industry’s most cash-rich companies, CGC is definitely burning cash at a high rate. Its cash reserve has fallen 39% in the past year and 13% in the past three months. CGC’s cash is also not an outcome of its operating profitability. Instead, in November 2018, Constellation Brands completed an investment of 5 billion Canadian dollars in lieu of a 37% stake in CGC.
Analysts don’t expect CGC to become profitable in the foreseeable future
Wall Street analysts expect CGC’s EBITDA to be -441.89 million Canadian dollars and -212.90 million Canadian dollars in fiscal 2020 and fiscal 2021, respectively. Analysts expect the company to become EBITDA-positive and report 54 million Canadian dollars of EBITDA in fiscal 2022. However, CGC may not become non-GAAP (generally accepted accounting principles) EPS-positive even by fiscal 2022. Analysts expect CGC’s non-GAAP EPS to be -5.59 Canadian dollars, -1.05 Canadian dollars, and -0.40 Canadian dollars in fiscal 2020, fiscal 2021, and fiscal 2022, respectively.
On November 29, as reported by MarketWatch, MKM analyst Bill Kirk said that he didn’t expect CGC to become profitable by fiscal 2022. The analyst also highlighted the need for ongoing investments to capture future growth opportunities. Kirk also expects CGC to continue to feel the pressure of increasing overall supply in the market.