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Canopy Growth Surprised Investors with Its Q3 Earnings

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Canopy Growth (NYSE:CGC)(TSE:WEED) surprised investors and analysts with its third-quarter earnings. The stock rose and closed with a gain of 13.3% on the NYSE. Canopy Growth closed with an increase of 15.8% on the Toronto Stock Exchange on February 14. The stock rose due to the company’s impressive results for the third quarter of fiscal 2020, which were a surprise. After Aurora Cannabis (NYSE:ACB) reported disappointing earnings, investors and analysts didn’t expect good results from Canopy Growth. However, last week ended on a good note for the cannabis sector.

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Canopy Growth’s revenue grew 

Canopy Growth’s third-quarter results were good news for Constellation Brands. The company reported declines in both its quarters of fiscal 2020. Also, the company reported losses in all of the quarters in fiscal 2019. Due to the losses, Constellation Brands announced that it wouldn’t increase its investments in Canopy Growth. Although the company didn’t report a positive EBITDA, the losses this quarter were lower sequentially. The company reported an EBITDA loss of 92 million Canadian dollars compared to 155 million Canadian dollars in the second quarter.

Canopy Growth stated that higher sales, improved gross margins, and lower operating expenses helped reduce the losses in the third quarter. Sequentially, the operating expenses decreased by 14%.

In the third quarter, Canopy Growth reported revenue of 123.7 million Canadian dollars—13.2% growth sequentially. The company also surprised analysts and beat their estimate of 108.6 million Canadian dollar revenue for the quarter.

In comparison, Aurora Cannabis’s second-quarter results were a bit of a letdown. The company’s net revenues of 56.0 million Canadian dollars missed analysts’ expectations. Aurora Cannabis reported another quarter with an adjusted EBITDA loss of 80.25 million Canadian dollars.

Analyzing revenues in the third quarter

Sequentially, Canopy Growth also saw an 8% increase in its gross recreational B2B revenue in Canada. Meanwhile, 140 stores became active during the quarter. Higher sales of premium dried flower and pre-rolled joints also helped with the sales increase. The same-store sales growth contributed to a 16% YoY (year-over-year) increase in recreational B2C sales. A wider variety of products available led to more customers, which generated a 5% increase in YoY medical sales in Canada.

In the international market, the C3 revenue rose 5% sequentially. German cannabis sales also increased during the quarter after Canopy Growth figured out regulatory approval issues with the German government.

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The company’s strategic acquisitions generated positive results during the quarter. Organic growth and seasonal sales led to a 46% sequential revenue growth for Storz & Bickel vaporizers. Also, This Works revenue grew 42% YoY. The company also saw the demand and sales increase for hemp-derived CBD products in the US. Currently, the US is a significant market for the cannabis sector. Marijuana legalization in the US will likely help cannabis companies.

Management’s view on the results

Mike Lee, Canopy Growth’s EVP and CFO, said, “We delivered a significant gross improvement in the third quarter driven by stronger revenues and higher capacity utilization. Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization.”

The company also thinks that with a strong balance sheet and 2.3 billion Canadian dollars in cash in hand, it’s in an excellent position to win in the global cannabis market. For the fourth quarter, Canopy Growth expects its overall revenue to increase modestly.

Canopy Growth stock has rebounded this year

As a Raymond James analyst estimated, big cannabis players could see a rebound this year. Analysts didn’t expect extraordinary results from Canopy Growth this quarter, so the third-quarter improvement was a surprise. While Aurora Cannabis struggled due to its rising debt burden, Canopy Growth is in a safer place. Backed by Constellation Brands, Canopy Growth has room to make mistakes and learn from them. The company’s strategic acquisitions showed results this quarter and contributed to the better-than-expected results.

Canopy Growth’s results brought the cannabis sector back to the green. The stock rose 15% on February 14. Meanwhile, Aurora Cannabis stock rose 7.4%, Hexo rose 19.6%, and Aphria (NYSE:APHA) rose 3.6% on February 14. The Horizons Marijuana Life Sciences ETF (TSE:HMMJ) increased by 5.8%.

Despite Canopy Growth’s reliable results, many analysts think that it hasn’t stopped the bleeding for the entire sector. Headwinds still exist and the industry needs some production tightening and financing to continue its growth. Things are still tough for smaller cannabis companies.

Stay with us to learn more about the cannabis sector.

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