Yesterday brought some disappointing news for investors in the world’s biggest cannabis company. Canopy Growth Corporation (TSX:WEED) (NYSE:CGC) shares took a hit after the company posted losses of $1.28 billion CAD—that’s $3.70 a share—for the fiscal quarter ending June 30.
A loss of more than a billion dollars is a major hit for almost any company. For a company in the cannabis space, it’s potentially ruinous. But is the loss as terrible as it seems?
“Everybody’s got it all wrong,” says Rich. “Canopy Growth is selling off right now, and they’re down big after the release of their Q1 financials for 2020. But it’s not a $1.2 billion loss out of their bank account. It’s a paper loss.”
Let’s break down what this news means for Canopy, the company’s investors, and the cannabis industry as a whole.
Canopy Growth Might Not Be Growing Enough
Revenue for Canopy Growth exceeded $100 million for Q1, which represents quadruple growth from the company’s Q1 2018. The increase in revenue mostly resulted from sales of recreational marijuana, which generated $61 million for the company. This accounts for close to 60 percent of the total revenue in the quarter.
Despite this growth, revenue did fall slightly below the projections of industry analysts, who believed the company would make $109 million in the quarter.
Still, Canopy greatly increased its harvest from just under 10,000 kgs a year ago to more than 40,000 kgs now. While that increase in production is certainly laudable, the biggest cannabis company in the world isn’t the biggest in terms of cultivation. As Rich pointed out yesterday, Zenabis Global Inc. (TSX:ZENA) (OTCPK:ZBISF) can produce 40,000 at just one of its facilities.
In addition, Canopy’s closest competitor, Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), has a peak production capacity higher than any other company can dream of. With all of its facilities operating at maximum output, Aurora projects that it could produce upwards of 630,000 kgs of cannabis on an annual basis.
Canopy Explains the Loss
In its press release, Canopy said that the loss was mainly due to the extinguishing of warrants relating to the Constellation Brands (NYSE:STZ) investment.
“This is where everybody’s getting confused,” Rich explains. “The real loss is $92 million. So I don’t want anyone to panic over something this isn’t. The Q1 growth is actually impressive.”
In addition to the warrants, Canopy said that the increase in expenditures was caused by greater marketing, promotional campaigns, and a build-out of retail stores in preparation for cannabis edibles being legalized in Canada. The company explained that it is also preparing to enter the CBD market in the United States.
Rich speculates that Constellation wants to buy the rest of Canopy Growth. Therefore, it would want Canopy stock to go down so that it could acquire the company at a discount. He even believes this could be the reason behind the controversial decision to terminate Canopy founder Bruce Linton.
While this week saw some big hits to Canopy’s stock price, falling from a high of $45.25 on Tuesday to a low of $36.14 on Thursday, it has risen by nearly two percent since opening today.
What do you think? Is the $1.2 billion loss something for Canopy to panic about? Is this bad news for the industry, or is there more going on than meets the eye? Let us know your thoughts in the comments below.
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