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Shares of Canopy Growth (NASDAQ:CGC) (TSX:WEED) are up more than 16% after the release of Q3 earnings, but we aren’t buying into the rally, at least not yet.
As much as we’d like to see this company make profits we’ve been here before, just when it seems like things are getting better they get worse again.
What we want to know—what we’re waiting for—are signs that profitability is not just some seasonal dream but a reality that can be sustained. Until then, the Canadian cannabis market is just another stock market-subsidized pipe dream waiting to go up in smoke.
Canopy Growth Corporation has been working hard for the last two, almost three, years to improve its operations and business. All the while it has suffered headwinds in the form of COVID-19 related shutdowns, ongoing oversupply issues, and the continued bottle-necking of licenses for new operations.
The end result is a better company but one still struggling with industry-related headwinds that it can’t seem to overcome. The $141 million in revenue is 380 basis points better than expected and a sequential growth but it is also down 7.5% from last year and comes with narrowing margins.
Moving down to the loss, the company posted an EBITDA loss of $67 million and GAAP EPS of -$0.28 Canadian (US$0.22). This is $0.04 better than the Marketbeat.com consensus but only $1 million better than last year due to lower sales and the deleveraging of fixed costs.
So, the income is a little better than last year, but due to revenue strength and not margin improvement. Margin actually narrowed and does not point to improving profitability. At the gross level, the GAAP margin contracted 900 basis points while the adjusted gross margin contracted a more substantial 1300 basis points.
"Throughout fiscal 2022, we continued to reduce our operating expenses and capital investments. With a renewed sense of urgency, we are focused on achieving profitability in Canada by taking additional steps to simplify our business and optimize our expenses, while making strategic investments in key growth areas."
The analysts are still holding Canopy Growth Corporation but they are no longer as bullish as they once were. Now the sentiment is more “hold what you have until U.S. legalization” than anything else with not one note or shout-out since the release of the Q3 results.
It is worth noting the consensus price target is projecting about 100% of upside for the stock so there is some value in the company. The question for us is when is that value going to start being realized because all we’ve seen of the cannabis market is one sell-off after another.
Shares of Canopy Growth Corporation hit a bottom just days before the release of earnings and is extending that rebound now. The caveat is that price action is still in a downtrend and the best we expect is for range-bound sideways trading to set in.
If the company can improve on its results in the current quarter, the rally may extend itself, but we are not holding our breath. In our view, the cannabis stocks should be on your watch list but it is still too early to start getting excited about them again. That time won’t come until true profitability and/or U.S. legalization.
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