A cursory glance at Canopy Growth’s (NASDAQ:CGC) year-to-date price chart suggests now may be time to pick up inexpensive shares of the stock. After all, just a few months prior shares were double their current $25 price.
However, that narrative would only be valid if the company were moving in a positive direction. Recent earnings and other news indicate that it is stagnating, and that the company is one to avoid at present.
CGC Stock Earnings
I’m a big proponent of the idea that broad fundamental metrics are among the most valuable indicators of a stock’s buy worthiness. That’s why it might be surprising that I suggest investors avoid it even though Canopy Growth reported a 37% increase in revenues this fiscal year.
Of course, revenues are only the top line of a financial statement and costs associated with that revenue can tell a drastically different story. There’s a lot that can go wrong that can turn revenues into losses instead of profits.
And there were a few issues which hurt CGC stock in that respect. First, Canopy did worse than Wall Street anticipated it would. Revenues were slightly lower than anticipated and analysts Bill Kirk of MKM Partners noted that there were real disappointments, including an “adjusted gross margin of 14%, compared to 26% in 3Q and 42% in the year prior.”
Then there’s another problem which continues to plague the wider cannabis industry. That is the issue of profitability. Investors in the sector have grown weary at the lack of profitability from cannabis companies as Canada nears its three-year anniversary of legalization.
Canopy Growth CFO Mike Lee stated that the company expects profitability sometime in the second half of 2022. That expectation is based on an EBITDA measurement which stood at a 94 million CAD loss in this most recent quarter. Canopy Growth’s net loss, which factors in interest, taxes, depreciation, and amortization, hit 616.7 million CAD this quarter.
The cannabis industry is continuing to disappoint, and Canopy Growth is continuing to disappoint.
Transition Toward Value Added Goods
Investors who dive into Canopy Growth’s revenue sources will have a better understanding of where the company is and where it wants to go.
The issue is fairly straightforward: Canopy Growth is trying to pivot toward a greater percentage of sales from value-added products. Value added products carry higher margins, so if a company can sell them, it will.
But doing so isn’t as easy as simply willing it into existence.
The problem for Canopy Growth is that it derives a significant portion of its revenues from dry bud. In its 2020 fiscal year the company received 275.5 million CAD of sales from dry bud, and in the 2021 fiscal year, 278.5 million CAD. It is clearly trying to get away from selling dry bud as it accounted for 73.5% of revenues in fiscal year 2021, down from 93.4% of total revenues in 2020.
That means that Canopy Growth is moving toward a greater percentage of sales from higher margin oils, soft gels, edibles, and beverages.
Dry bud is essentially a commodity. Canopy Growth probably doesn’t want to be a commodity producer. But the problem with the higher margin products mentioned above is that smaller, more focused companies have already established themselves in those niches. The other issue is that well-heeled alcohol companies are buying their way into the space.
That leaves Canopy Growth between a rock and a hard place scrambling to find profitability perhaps sometime next year. And it also makes CGC stock less than attractive for some time to come.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.