Canopy Growth Stock: Bearish and Horrible Q3 Earnings (NASDAQ:CGC)
like a clock, canopy growth (CGC) released another disappointing quarterly report. The company promotes impressive results from a few smaller divisions, but the company as a whole continues to struggle due to disappointing numbers in Canada. My investment thesis remains very bearish on the stock due to the lack of gross margins needed to push the company towards profitability.
Canopy Growth reported that net revenue for the third quarter of 2022 decreased 8% from FY21 levels to C$141.0 million. The cannabis company has provided a slide that highlights the gruesome results in one quick view.
The Canadian cannabis company operates in so many different divisions that the business seems too much to manage. BioSteel said its revenue soared 130% to C$17.0 million, but Canada’s main cannabis business saw sales drop 21% to C$60.7 million. Additionally, the company has seen just about all chain watch sales drop year over year.
Many of the issues appear to be related to Canopy Growth no longer focusing on the primary home market while seeking out smaller ancillary markets. Maybe the Canadian cannabis market is too competitive, but total sales in Canada have only increased over the years since the first legalization of recreational cannabis in October 2018. Even in a difficult year, monthly cannabis sales have increased from C$279.5 million in January to 353 .7 million Canadian dollars in November.
Also, keep in mind that these Canopy Growth sales numbers are down despite the company closing deals for Ace Valley and Supreme Cannabis in 2021. The stock is up 15% from quarterly results in due to a sequential improvement in quarterly results, but the company is still too far from being profitable for a slight increase in quarterly sales to be relevant.
Canopy Growth posted a meager adjusted gross margin of 13% in the quarter, which resulted in an EBITDA loss of C$67.4 million. The company recorded negative free cash flow of C$168.3 million, continuing a history of cash burn on the balance sheet.
Canopy Growth has burned C$900 million in cash over the past year, bringing the cash balance to C$1.4 billion. Remember that the company raised C$1.5 billion in debt over the years, so the large cash position has now been completely burned to create a low margin, losing business money with no logical path to earnings given that Canopy Growth has negative EBITDA margins of 48%.
In the December quarter alone, SG&A expenses were still extremely high at C$116.8 million. Even with gross margins of 45%, Canopy Growth would only generate C$63.5 million in gross profit, requiring the company to cut quarterly general and administrative expenses by C$53.3 million to reach the ‘balance.
Incredibly, the Canadian cannabis company has already cut spending by C$27.2 million from FQ3’21 levels. The primary indication of many of the restructuring plans in the Canadian cannabis space is that lower spending is leading to undesirable results in terms of gross revenue and profit. Whether it’s due to lower marketing costs or the loss of key revenue-generating personnel, the company cannot sustain past revenues in profit while cutting massive costs.
Share the growth of the number
The only real metric Canopy Growth is growing is the number of diluted shares. The company ended FQ3’22 with 393 million diluted shares outstanding, up from 160 million in 2017.
The company has options and warrants outstanding, which puts the fully diluted share count at a higher level. In the absence of earnings, Canopy Growth does not have to report these numbers in the fully diluted stock count in the quarterly financial statements.
The inefficient use of stocks and cash should give investors limited reason to pay a higher price for the stock. Yet Canopy Growth is surging on the back of those earnings despite the shares trading at a market cap of $3.5 billion, while analysts forecast FY23 sales of just $522 million. .
Yes, the stock is trading at 6.7 times forward sales while the company has no real path to earnings. Canopy Growth no longer has a positive net cash balance to fend off concerns about losses and overspending. The company will now begin reporting significant net debt balances as well as each quarter where cash outflow rates match the recent trajectory of over C$100 million per quarter.
To take with
The main takeaway from investors is that nothing in the December quarter or in Canopy Growth’s history suggests investors should stock up here. Canadian stocks remain well overvalued relative to US cannabis stocks while performing much worse. Investors should take advantage of this rally to exit the stock.