Sure, earnings season may have passed for the lion's share of brand-name companies, but that doesn't mean earnings reports cease altogether. Next week, the biggest name in all of cannabis, Canopy Growth (NYSE: CGC), will be dishing on its performance in the fourth quarter and full year of fiscal 2019.
According to a company press release, the largest pot stock in the world by market cap will be releasing its operating results after the closing bell on Thursday, June 20. Regardless of whether you currently own stock in Canopy, have considered buying in, or are simply invested in other pot stocks, Canopy Growth is an industry trendsetter, making its quarterly report a must-see for marijuana stock investors.
When Canopy Growth does lift the hood on its quarter, here are 10 numbers you'll want to be focusing on.
1. Gross/net revenue
Though blatantly obvious, the first figure you'll want to home in on is Canopy Growth's gross and/or net revenue. Net revenue is simply gross revenue minus the excise tax paid by growers to the Canadian federal government.
Despite Canopy's being a leader in quarterly revenue, and a top two producer in Canada, supply chain issues are expected to have seriously weighed on the company's fiscal fourth-quarter results. Let's keep in mind that cannabis store revenue in Canada actually declined month over month in January and February, which will make it very difficult for Canopy to substantially grow sequential quarterly sales. Per Wall Street's consensus, gross revenue is expected to climb from the sequential third quarter by less than 4%.
2. Recreational sales as a percentage of total cannabis sales
Whereas Canopy's primary rival, Aurora Cannabis (NYSE: ACB), has decided to focus its attention on the medical marijuana community (Aurora generates half its cannabis sales from medical pot), Canopy Growth's initial quarter of recreational marijuana sales in the post-legalization environment in Canada showed that it's angling for a good chunk of the adult-use consumer base. Of total pot revenue in Q3 2019, almost 80% was derived from the adult-use market. Then again, this shouldn't be a surprise, given that the company has around 70,000 kilos of annual wholesale supply deals with Canada's provinces.
Keep an eye on the ratio of recreational revenue to medical sales in Q4 to see if it's shifted substantially from the sequential quarters' roughly 80%-20% mix.
3. Average selling price per gram of dried flower
Supply-and-demand economics would suggest that if demand is outpacing supply, the price of a good or service should rise. Since the green flag began waving on recreational weed in Canada, supply has been challenged, although the per-gram price of dried flower has still declined for most growers, mostly because of the aforementioned excise tax on adult-use marijuana sales being factored into the per-gram price.
But Canopy Growth should be an interesting case. Likely having sold the most marijuana in the first quarter of calendar 2019, its average sales price per gram could tell an interesting story about supply-and-demand economics in the cannabis space. If the average selling price per gram does somehow rise, cannabis stocks could benefit big-time, once supply issues are pushed into the rearview mirror.
4. International sales
Investors would also be wise to keep a close eye on Canopy Growth's international sales in the fiscal fourth quarter. With a production, export, distribution, or research presence in 17 countries, including Canada, Canopy Growth sits behind only Aurora Cannabis, which has a presence in 24 countries, as the most globally diverse cannabis company.
However, sales in foreign markets have yet to really take off, partly because the infrastructure needed to be successful is still being developed, and also because domestic demand in Canada isn't even close to being satiated. Nevertheless, overseas sales channels are of long-term importance to Canopy, which means sales in international markets should be monitored closely in the fiscal fourth quarter.
5. Licensed square footage
Unlike many of its peers, Canopy Growth hasn't been all that up front with its projected peak production figures. It does, however, regularly note how much of its cultivation square footage is licensed across its 10 production facilities. At last check, the company had more than 4.4 million square feet of its 5.6 million square feet devoted to growing licensed marijuana by regulatory agency Health Canada. It'll be interesting to see if additional licensing progress has been made.
Further, don't overlook the fact that Health Canada is changing its policy on submitting cultivation license applications. Moving forward, grow farms must be complete prior to submitting the application, which should move underfunded projects out of the way and pave a path for companies like Canopy Growth and Aurora Cannabis to succeed.
6. Hemp processing expenditures/sales outlook in the U.S.
Canopy Growth has also been adamant about pushing (legally) into the U.S. via the hemp market -- although not as a producer. In January, the company was awarded a license in New York state that will allow it to process hemp, and in November it completed its acquisition of Colorado-based intellectual property (IP) company ebbu, which holds IP that could come in handy for hemp or cannabis production. Having infrastructure on U.S. soil may help Canopy get a leg up on the competition if the U.S. federal government ever changes its tune on marijuana.
But of particular interest in its upcoming fourth-quarter report is just how much money Canopy is budgeting for its hemp projects, as well as how much revenue it expects to generate from its U.S. ventures. Expect this to be in the company's fiscal 2020 outlook portion of its report, or perhaps the management discussion and analysis filing with SEDAR in Canada.
7. Operating loss
Although this probably comes as little surprise, Canopy Growth is going to lose money on an operating basis. If we look past all of the one-time benefits and expenses, such as fair-value adjustments on biological assets, and revaluations of warrants and securities, it's essentially a given that the company will have lost money in the fiscal fourth quarter. The question is, how much?
Through the first nine months of fiscal 2019, Canopy Growth had lost more than 402 million Canadian dollars on an operating basis, and it's unlikely that the company's operating expenses will have declined in the fourth quarter. This makes for a very real possibility of more than CA$500 million in operating losses in 2019. Ideally, we'd like to see the company's operating loss of CA$157.2 million decline sequentially, but I wouldn't suggest holding your breath.
8. Cash on hand
There simply isn't another marijuana stock on this planet that's better funded than Canopy Growth. A big part of that has to do with Corona and Modelo beer maker Constellation Brands making three separate investments in the company, the last of which totaled $4 billion (that's U.S.) and upped its equity stake in Canopy to 37%. As of the end of the third quarter (Dec. 31, 2018), the company had almost CA$4.92 billion in cash, cash equivalents, and marketable securities.
Then again, Canopy Growth has been a busy bee on the acquisition and expansion front. It's angling to gobble up Acreage Holdings in the U.S. for $3.4 billion, which included an upfront cash payment of $300 million, and has made numerous smaller purchases. How much of the company's cash pile is still left? That's a figure a lot of us are waiting to see.
It's very common for a purchasing company to pay a premium above and beyond tangible assets to make a deal happen. This premium is usually noted as "goodwill" on the balance sheet. The hope for the acquirer is that the assets acquired can be developed, and the amount of premium paid recouped, leading to a reduction or elimination of goodwill.
With Canopy Growth being a regular purchaser of cannabis and hemp businesses, we've seen its goodwill jump to CA$1.82 billion out of CA$8.64 billion in total assets at the end of the fiscal third quarter. This is a reasonably large amount of goodwill to be carrying, and it's only likely to grow given its acquisition history. Pay close attention to Canopy's goodwill figure as a percentage of total assets. If it continues to rise, the chance of future writedown may increase.
10. Share-based compensation
Finally, even though I'm not a fan of focusing too much on one-time benefits and expenses, it's pretty hard to ignore the insane share-based compensation expenses that Canopy Growth doles out each quarter. Though share-based compensation is mostly performance-based, it's counted as CA$108.2 million of the company's CA$423 million in operating expenses through the first nine months of fiscal 2019.
Ideally, we'd like to see share-based compensation reined in a bit to reduce operating losses and not continue to balloon the company's outstanding share count. But whether or not that happens remains to be seen.
Now that you have your game plan in place, it's just time to watch and wait for the biggest pot stock in the world to deliver the goods after the market close on June 20.
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