Canopy Growth (CGC) Earnings After The Bell: How High Can They Go?

Q2 earnings are winding down with only a few exciting names yet to come. The largest publicly traded cannabis company is releasing earnings this evening, and investors need to see some positive results.

Canopy Growth (NYSE:CGC) is reporting its June quarter results after the bell today. CGC has recently been a big mover on earnings with an average move of 9.4% over the last 4 earnings (2 up, 2 down).

Analysts are estimating an EPS of (-$0.28) on sales of $86 million. This would represent an EPS decline of 133% year-over-year, but revenue growth of 309%. Canopy has missed on the last 4 EPS estimates and 3 out of the previous 4 revenue projections. CGC share price is driven more by management guidance and marijuana news than it is by surprises on earnings or sales on earnings releases.

Constellation’s Stake

Constellation Brand (STZ) increased its stake in Canopy Growth to roughly 40% (from the original 9.9% in 2017) for $4 billion back in August of 2018. Constellation targeted Canopy because of its diverse portfolio of cannabis-based products and scalability that would allow STZ to get its foot in the door in an industry that is going to take off.

Constellation Brands (NYSE:STZ) is the second-largest U.S. alcohol company with long-standing distribution and supply chain operations. This partnership is one of the best things that could have happened to Canopy Growth, giving them access to Constellation’s well-established supply chain to quickly scale operations in Canada and in the ability to do so in the U.S. when legislation legalizes marijuana federally.

Constellation and Canopy are working closely to come up with a fast-acting marijuana-infused beverage that provides the consumer with a mild buzz without the calories of beer.

CGC has been on an acquisition frenzy, buying up as many diverse cannabis players as they can to put their stake deep in the cannabis soil. This surge in cash from Constellations increased their acquisition ability with management putting C$1 billion (roughly $750 million USD) aside for further purchases in this ripe industry.

U.S. Cannabis Industry

A significant portion of the future growth priced into these cannabis stocks is contingent on the U.S. federally legalizing weed. The market for marijuana in Canada is expected to grow at over 77% annually, according to Cannabis Business Plan. The market in the U.S., if legalized, is anticipated to grow even faster. Some analysts are predicting that it could even surpass the $100 billion U.S. beer industry.

The modern consumer has changed as a generational consumption shift materializes. Millennials are now the largest consuming generation, and purchases are becoming increasingly health motivated. A low-calorie marijuana-based beverage or snack could be just what these next-generation consumers are looking for as an alternative to alcohol.

The Pot Stocks

Top Canadian cannabis stocks include Canopy Growth, Cronos Group (NASDAQ:CRON) , Aurora Cannabis (TSX:ACB) , and Tilray (NASDAQ:TLRY) . All the pot stocks saw strong rallies in the in first few months of the year but have retreated quite a bit since. Below you can see how these stocks have traded since the beginning of the year.

These Canadian marijuana stocks are trading at exceptionally high multiples and beta’s north of 3. Since these firms are yet to turn a consistent profit an useful metric for valuation is forward price-to-sales (P/S). CGC is trading at 17x P/S, on the lower end of its 5-year trend, but multitudes higher than the S&P 500’s 3x. This multiple is being propelled by the triple-digit top-line growth figures that are expected over the next 2 years. These upcoming earnings reports will be crucial in deciding whether the extreme valuations are warranted.

Take Away

Canopy Growth and its publicly traded peers are all very high-risk stocks but could yield significant returns in the future once the U.S. federally legalize marijuana. Canopy is the clear leader in this space with a vastly diversified portfolio of cannabis products along with its STZ partnership and impending Acreage Holdings acquisition. CGC is making all the right moves to continue gaining market share as the market itself proliferates.

Before the U.S. legalization push, another phase of Canadian regulation is expected to open up more streams of revenue for Canopy’s diverse portfolio of cannabis products. Look for this regulation release in October of this year.

Tonight’s earnings release is likely to be another crapshoot for CGC but look for management’s guidance on expansion expectations.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>