Canopy Growth’s (NYSE:CGC)(TSE:WEED) results for the third quarter of fiscal 2020 were a boon to the struggling cannabis sector. The cannabis sector had a hard time in 2019. So far, the sector has faced negative news in 2020. Aurora Cannabis (NYSE:ACB), one of the big names in the cannabis space, gave a string of disappointing news this month. However, Canopy Growth’s earnings were good news for the sector. As I discussed earlier, it’s essential to note what the company’s management says in the earnings call. The comments give us an idea about the company and the sector’s prospects. Let’s take a look at key takeaways from the company’s third-quarter earnings call.
Was Canopy Growth’s earnings a boon to the cannabis sector?
Aurora Cannabis’s earnings weren’t impressive. Also, the company’s CEO stepping down and a bleak outlook for the future didn’t help the stock or the cannabis sector. However, Canopy Growth reported better results compared to Aurora Cannabis. Even though the results weren’t good news, the company managed to lower its losses and provide an uplifting outlook. To learn more, read Canopy Growth Surprised Investors with Its Q3 Earnings.
In the third-quarter earnings call, David Klien, Canopy Growth’s new CEO, was optimistic about the cannabis sector. He thinks that the cannabis market is one of the most significant growth opportunities. Canopy Growth is positioned well to take advantage of the growth opportunities. For now, the company’s balance sheet is its strength. While Aurora Cannabis is struggling with the increasing debt burden, it only has 2.3 months of cash on hand, according to Bloomberg. As a result, Aurora Cannabis is cutting 25% of its workforce to hit profitability amid the cash crunch. In comparison, Canopy Growth has 2.3 billion Canadian dollars in cash, which gives it an edge over its peers.
Update on Cannabis 2.0 products
David Klien thinks that to win in this sector, it’s crucial to understand which marijuana products consumers prefer. He aims to use the production capabilities and produce consumer-preferred quality products. The company already tried doing the same with Cannabis 2.0 products. Keeping in mind the demand, Canopy Growth produced a variety of cannabis-infused edibles and beverages. The company shipped its first edible product, Premium Chocolate, from its Smiths Falls facility in December 2019.
Later, Canopy Growth shipped other products like Multiple products, Tokyo Smoke Go, Tokyo Smoke Pause, and Tweed Baker Street, which have seen good sales. The company plans to launch “Being in Bud” this month and various other products in the first quarter of fiscal 2021. In the vape products category, Canopy Growth already launched JUJU Power, a UL 8139 certified rechargeable battery for 510 cartridges in January this year, which is experiencing strong demand.
Canopy Growth thinks that its cannabis beverages will attract an entirely new range of consumers. The company wants to focus on delivering the right products that are safe to consume and use. As a result, Canopy Growth will spend time to get it right. Soon, the company will launch a variety of low calorie and high-quality cannabis beverages, which could give the alcohol sector fierce competition. Currently, the alcohol industry is losing steam. Consumers are becoming health conscious. Constellation Brands (NYSE:STZ) saw a tremendous growth opportunity in the cannabis industry and invested in Canopy Growth. Constellation Brands still believes in the cannabis boom.
A Forbes article also discussed how cannabis is outranking the alcohol industry due to growing health concerns. According to Klien, Canopy Growth’s marijuana-infused beverages could be a “game-changer.”
How analysts view the stock
Canopy Growth reported a lower-than-expected loss in the third quarter. Meanwhile, Aurora Cannabis reported a steep decline in its revenues and continued with an EBITDA loss in the second quarter. Canopy Growth beat analysts’ revenue estimates, which impressed investors and analysts. According to a CNBC article, Jesse Pytlak, an analyst at Cormark Securities, said that Canopy Growth’s earnings are encouraging. The analyst said, “The company demonstrated positive progression across several key areas, the pace of which was better than we had anticipated.”
CIBC raised the target price for Canopy Growth stock to 35 Canadian dollars from 30 Canadian dollars. Canaccord Genuity raised the target price to 28 Canadian dollars from 25 Canadian dollars.
PI Financial downgraded Canopy Growth to “neutral” from “buy.” However, PI Financial increased the target price to 30 Canadian dollars from 25 Canadian dollars. The average target price for the stock is 31.89 Canadian dollars. The target price implies a 6% upside potential to Monday’s closing price. Canopy Growth closed at 29.98 Canadian dollars on Monday on the Toronto Stock Exchange.
What does Wall Street think about Canopy Growth stock?
Currently, 21 analysts are covering Canopy Growth. Among the analysts, 12 recommend a “hold,” while five recommend a “buy.” Three analysts recommend a “strong-buy,” while one recommends a “strong sell.”
The stock lost 25.4% of its stock value in 2019. In 2020, the stock has risen 9.7% year-to-date. After the company reported its earnings, the stock closed with a gain of 15.8% on February 14. Similarly, the stock, which trades on the NYSE, also gained 13.3%. Canopy Growth’s results boosted the cannabis sector, which struggled after Aurora Cannabis’s earnings. Aurora Cannabis stock also gained 7.4% on February 14. Meanwhile, Aphria (NYSE:APHA), Hexo, and Cronos Group gained 3.6%, 19.6%, and 6.8%, respectively. The Horizons Marijuana Life Sciences ETF also gained 5.8% on February 14.
Canopy’s management stated during the earnings call that they will provide more highlights about future plans in the fourth-quarter earnings call. The company is also working to bring a supply-demand balance soon, which was the main issue for the cannabis sector’s dilemma last year. Were Canopy’s results were enough to boost and bring back the cannabis sector? We’ll have to wait and see if the rebound continues.
Stay with us for more updates on the cannabis sector.