Canopy Growth shares popped 11% Tuesday, following the Canadian cannabis company’s bigger-than-expected loss for its fiscal Q3, but revenue that beat estimates, and offered an optimistic outlook predicting the company will achieve profitability by the second half of 2022.
Smith Falls, Ontario-based Canopy [$CGC] [$WEED] posted a net loss of C$829 million ($650.9 million), or C$2.43 a share, for the quarter to December 31, more than the loss of C$109.6 million, or 26 cents a share, posted in the year-earlier period.
The net loss was largely due to impairment and restructuring charges of C$416 million, the lion share of which stem from CEO David Klein’s overhaul of the company’s sprawling operations. In December, Klein announced the closure of four of Canopy’s indoor facilities and halting of outdoor cannabis grow in Saskatchewan, resulting in the loss of about 220 jobs.
Klein, who was brought in from Constellation Brands [$STZ] Canopy’s largest shareholder with a stake of about 39%, is looking to cut costs by up to C$200 million in the next year. On the earnings call, Klein mentioned he’s enthusiastic about the “prospects of promising cannabis reform in the U.S. under the new administration in Congress.” President Biden and his administration are expected to undertake a reform agenda and many believe it may include an end to the federal ban on cannabis.
That would place Canopy in a strong position, as it has a takeover agreement with multi-state operator Acreage Holdings [$ACRHF] that will be triggered if the law changes, giving it an instant foothold in the U.S. Klein said legislation that Majority Leader Chuck Schumer has promised to deliver in the near term, or a combination of reform measures, “could allow Canopy to enter the U.S. THC market during calendar 2021.” DoorDash Gobbles Up Robotic Food-Prep Company Chowbotics
“Our government relations team is working very closely with key members of Congress to pave the way for cannabis reform that addresses both the much-needed social justice reform and provides a boost to the post-pandemic economy by creating jobs and generating tax revenues,” he told analysts during the call.
Canopy is seeking to generate positive operating cash flow in fiscal 2023 and positive free cash flow in fiscal 2024, CFO Mike Less said on the call. Those predictions are based on the assumption that the Canadian recreational market will grow 40% in fiscal 2022 and offer a compound annual growth rate of 25% to 35% from fiscal 2022 through fiscal 2024. Hey Glu Mobile, EA is the Captain Now
Net cannabis revenue came to C$99 million in the quarter, bolstered by an increase in Canadian recreational and international medical sales. Growth was also amplified by an increase in sales of S&B vapes, This Works health and wellness products and demand for the company’s U.S. CBD products under the Martha Stewart brand and consumer packaged goods under the BioSteel sports nutrition brand acquired in 2019.
Jefferies analyst Owen Bennett said that while question marks remain around Canadian delivery and overall losses are still significant, “sentiment is very much tied to the US anyway. “Here, recent trends in CBD are impressive, while Canopy continues to be the best positioned Canadian name in terms of US optionality for near term legislative reform. This optionality is very much in the price already though,” he wrote in a note to clients. Bennett rates Canopy as hold.
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