Beating expectations carries a lot of weight with investors. Even if it's as simple as losing less money than analysts expected, if a company can beat the spread, so to speak, it proves that much more attractive to investors. That point was demonstrated nicely by Canopy Growth (NYSE:CGC) whose earnings report wasn't attractive objectively, but subjectively, it pulled off quite a coup.
Sometimes a Loss Isn't a Loss
The news wasn't all bad at Canopy Growth this quarter; the company managed to bring in a record-high quarterly net revenue, bringing in $135.3 million Canadian this quarter. That's up from $85.6 million previously.
However, despite gains in revenue, expenses are still massive, and the company posted a loss of $32.06 million, which came out to about a $0.09 per share loss. Given that FactSet was projecting a loss of $0.37, however, it's enough for a win since the company beat expectations by a factor of around four to one, even if it was still a negative at the end of the day. There are also signs that the company is getting its expenses more under control, as total Sales & Marketing and General & Administrative (SG&A) expenses were actually down by 19% over the same time last year.
While there was some headway made in lowering SG&A costs, research and development (R&D) costs kicked in harder, increasing 19% as the company continued research studies that started after this point last year.
A Valiant Fight
Canopy Growth may look like a loser on the surface, and with numbers like these being posted, there's actually some support for such a perspective. However, looking at the broader picture suggests there's room to turn things around.
The company has been actively working to better position itself in the Canadian recreational marijuana market, and has achieved sound results therein. Now, the company holds 15.5% of the market, which is up 200 basis points against this time last year. While the company saw brisk growth in Ontario and British Columbia, it actually saw a small drop in Alberta, causes of which are currently unknown.
The company has also branched out into different product lines. It improved its market share in flower sales—which makes a certain sense; the facilities required to grow marijuana can be adapted to flower growth fairly rapidly—and also improved its position in the “cannabis-infused beverage segment,” giving it a 54% market share on the strength of five such beverages. It launched a new one recently, and so far, has shipped over two million beverage units.
The company has even moved into other markets; back in September, the company got together with Martha Stewart to bring out a line of CBD gummies, oils, and soft gel products, and moved to bring the beverage line in via the Constellation Brands (NYSE:STZ) network. It's projected the company will be available in 100% of US markets via direct-store delivery (DSD) systems early in 2021.
Skeptical Analysts and an Uncertain Proposition
The analyst community, meanwhile—as noted in our latest research—considers the company a “hold”, with three “sell” ratings, 12 “hold” ratings, three “buy” ratings and one “strong buy.” That's a far cry from six months ago, when the company held 13 “hold” ratings and 10 “buy” ratings. The price target has also been in a steady decline, too, dropping from $37.88 six months ago down to $28.12 today, the lowest point it's been at in that six month interval.
There are still points that suggest this as a buy. The price is down, which provides a natural entry point, and the company has been rapidly building up new product lines that will help give it an advantage in the field. With an upcoming political climate that may be more open to such operations—though given the state of the political climate right now it might be better to hold off a bit and see how that development boils down first—there's a good potential to get in. Yes, the company's expenses are still exorbitant, but it's also clear they're temporary. R&D-heavy operations are expensive but have a good chance to produce results.
All told, Canopy Growth is a risky operation, but one that has its share of points in its favor. A small buy here could be rewarded heavily down the line.
