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What to Expect from Canopy Growth’s Q3 Earnings?

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Canopy Growth (NYSE:CGC)(TSE:WEED), one of the prominent players in the cannabis space, will report its earnings for the third quarter of fiscal 2020 before the market opens on Friday. For the quarter, analysts expect the company’s revenue to rise by more than 25%. Meanwhile, they expect the company’s EBITDA to be in negative territory.

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Analysts’ revenue expectation for Canopy Growth

For the third quarter, analysts expect Canopy Growth to report revenue of 104.02 million Canadian dollars. The revenue represents a rise of 25.3% from 83.05 million Canadian dollars in the same quarter of the previous year. Canopy Growth acquired C3, a cannabinoid company, and This Works, a natural skincare and sleep solutions company, in May 2019. These acquisitions could drive the company’s third-quarter revenue. Also, in December 2019, Canopy Growth introduced its CBD products in 31 US states where CBD is legal. Read What’s Canopy Growth’s First & Free Brand About? to learn more. The company’s revenue could rise due to growth in Canadian and international medical sales. The B2C recreational business could also drive the company’s revenue.

EBITDA in negative territory

Analysts expect Canopy Growth to report a negative EBITDA of 114.3 million Canadian dollars. The EBITDA represents a fall from a negative EBITDA of 75.1 million in the same quarter of the previous year. The lower gross margin and higher operating expenses could lower the company’s EBITDA during the quarter. Analysts expect the company’s gross margin to fall from 33.7% in the third quarter of fiscal 2019 to 27.2%. Notably, pricing pressure could lower the company’s gross margin. During that period, the company’s operating expenses could rise from 169.7 million to 269.4 million Canadian dollars.

For the fourth quarter, analysts expect Canopy Growth to report a net loss of 181.1 million Canadian dollars—an increase from 121.0 million Candian dollars in the same quarter of the previous year.

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Outlook

Before Canopy Growth reported its earnings for the second quarter of fiscal 2020, management expected to achieve revenue of 250 million Canadian dollars with a gross margin of 40% by the fourth quarter of fiscal 2020. However, following the second-quarter earnings, the company’s management announced that it might not achieve the target.

Analysts expect Canopy Growth to report revenues of 403.4 million Canadian dollars in fiscal 2020—a rise of 78.2% from 226.3 million Canadian dollars in fiscal 2019. For fiscal 2020, they expect the company to report a negative EBITDA of 455.4 million Canadian dollars—an increase from 257 million Canadian dollars in fiscal 2019.

Analysts’ recommendations for Canopy Growth

On January 28, BMO Capital Markets upgraded Canopy Growth from “speculative market perform” to “speculative outperform.” BMO Capital Markets also increased its target price from 25 Canadian dollars to 40 Canadian dollars. Read Why Did BMO Capital Upgrade Canopy Growth? to learn more. However, Jefferies lowered its target price from 25 Canadian dollars to 21 Canadian dollars.

Among the 21 analysts that follow Canopy Growth, nine recommend a “buy,” 11 recommend a “hold,” and one recommends a “sell.” As of February 7, analysts’ consensus target price was 29.90 Canadian dollars, which implies a 12-month return potential of 14.5%.

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Stock performance

As of February 7, Canopy Growth was trading at 26.12 Canadian dollars—a rise of 6.8% since it reported its second-quarter earnings on November 14. Although the company missed analysts’ expectations in the second quarter, the stock rose due to investors’ optimism about the appointment of a new CEO, the introduction of Cannabis 2.0 products, the launch of a new CBD brand in the US market, and positive commentary from analysts.

After falling 25.4% last year, Canopy Growth has lost another 4.4% of its stock value this year. Meanwhile, Aurora Cannabis (NYSE:ACB), Aphria (NYSE:APHA), and Cronos Group (NASDAQ:CRON) have fallen by 19.0%, 17.4%, and 8.4% YTD, respectively. On February 6, Aurora announced its preliminary second-quarter earnings. For more, read ACB Announces Q2 Preliminary Results, CEO Retires.

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