The cannabis sector was under pressure today after Canopy Growth Corporation (WEED.TO) (CGC) released fourth quarter financial results that were below expectations.
The Canadian cannabis producer dropped more than 20% following the report and we were not surprised by the decline. When compared to the prior quarter, Canopy Growth recorded a double-digit percentage decline in revenue attributed to a drop in the level of recreational sales in Canada.
During the quarter, Canopy Growth recorded a more than $1 billion (CAD) net loss or ($3.72) per share. Analysts had expected the Canadian cannabis company to have reported a loss of ($0.59) per share and we found the miss to be significant.
Revenue was short of the forecasts, and the company noted that fiscal 2021 will be a transition year in which a strategy reset is fully implemented. Canopy also withdrew its financial outlook due to pandemic-related uncertainty.
Canopy Growth also withdrew its previously communicated milestones for achieving positive adjusted EBITDA and net income. The change in the company’s financial outlook is worth noting and we will monitor how the management team is able to advance the business from here.
One of the few positive developments that we found in the earnings report is related to the Canadian cannabis retail market. In mid-March, Canopy Growth temporarily closed corporate-owned cannabis retail outlets and we believe that this had an impact on its quarterly financial results.
Last month, Canopy Growth opened 20 cannabis retail stores and we find this to be of importance. Although the retail outlets are open for a reduced number of hours per day, we expect the stores to generate better revenues in the current quarter (when compared to the fourth quarter) and are favorable on this aspect of the story.
Although the $1.3 billion net loss and the $102 million adjusted EBITDA loss that was reported by Canopy Growth was eye popping to say the least, it is important for our readers to understand that almost $750 million of the net loss was related to pre-tax restructuring and impairment charges.
With more than $2 billion of cash on the balance sheet, Canopy Growth is well positioned to survive the current market environment and is an opportunity that we are excited about. Going forward, we expect the company to record strong growth and believe that the re-opening of retail stores will be a major catalyst for growth for the business.
After Canopy Growth released quarterly financial results, several leading Canadian broker-dealers changed their ratings and lowered their price targets on the Canadian cannabis producer, and we have highlighted the changes below:
• Canaccord Genuity lowered its price target to C$21 from C$23
• CIBC cut Canopy to Neutral from Buy and lowered its price target to C$26 from C$35
• Eight Capital lowered its price target to C$23 from C$25
• Stifel cut Canopy to Sell from Buy and lowered its price target to C$18 from C$23
• Benchmark lowered its price target to C$23 from C$27
Going forward, the name of the game for Canopy Growth is execution and we will monitor how the new management team is able to drive the story forward. When compared to its peers, the company has recorded impressive growth and this is a trend that needs to change in order for the market to be excited about the opportunity.