After the massive success of the cannabis industry in the 2020s, 2021 turned out to be a not-so-favorable year for marijuana producers. Cannabis companies had to struggle to generate profits amid unfavorable inflationary conditions even though optimism surrounding the legalization of weed in the United States was at a peak.
Ontario-based Canopy Growth Corporation (NYSE: CGC) is one of the largest cannabis dealers in the world. Like most other cannabis players, Canopy Growth too had to face adversities in the last three years. The stock has lost more than 50% of its valuation in the past six months and close to 80% in the last year. In fact, recently after the release of its earnings report, it was one of the prominent decliners in the cannabis industry.
Canopy Growth fails to meet market expectations
Canopy’s February report was in line with the market’s expectations with its revenues beating consensus estimates. But when the company reported its fourth-quarter financials for the fiscal year 2022 on May 27, the market was unimpressed.
Canopy Growth had generated net revenue of $112 million which was 25% lesser compared to the corresponding quarter last year. Its global cannabis net revenue stood at $66 million and declined 35% while revenue from other consumer products fell 3% to $46 million. Overall revenue for the FY 2022 was 5% lesser than FY21.
Canopy’s gross margin was contracting too. It reported a gross margin of -142% for the quarter compared to 7% generated in the earlier year. Even after excluding the non-cash restructuring costs in the COGS of $119 million and the inventory step-up charges of $4 million from acquisitions the gross margin was still a negative 32%.
Driven by lower sales and narrowing gross margins, the EBITDA loss for the quarter and whole year also increased by $28 million and $75 million respectively to $122 million and $415 million. While free cash flow for the quarter had improved by 2% to $127 million, there was still an overall decline of 8% for the entire year.
Nevertheless, Canopy’s balance sheet is still strong as the company ended fiscal 2022 with $1.4 billion in cash.
Committed towards growth
Canopy Growth has one of the largest shares in the premium flower market through its established brands namely: Doja and 7ACRES. It has also almost doubled its share in the mainstream flower market from the last quarter on the back of strong consumer demand for its new Tweed flower strains, Chemdawg and Powdered Donuts. It has also introduced new beverage flavors like Tweed Iced Tea Guava and Deep Space Orange Orbit.
Last month it planned to acquire a cannabis extract and vaping technology developer in California called Jetty Extracts for at least $69 million in order to enjoy the full potential of the legal weed market in the US.
Following the completion of the acquisition the company will get up to 100% rights on Jetty’s outstanding shares and shall also explore the possible ways of bringing the said company’s products into the Canadian recreational market. Similar deals have also been struck previously with other organizations in the US like Acreage Holdings and edibles maker Wana Brands.
Canopy stock closed at $4.09 on June 6. The average analyst price target for the stock is $7.68, a potential upside of over 63%. The marijuana market does hold a lot of potential but isn’t in its best shape at this moment.
Venturing into this industry is risky. Even though Canopy Growth is taking several steps to redefine its operations there are a lot of other stocks that are fundamentally much stronger than this marijuana heavyweight. So, investors who don’t have much risk appetite or cannot afford to put their money for longer periods should avoid adding this stock to their portfolios.