Canopy Growth Looks Toward a Marijuana Revenue Explosion

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Marijuana stocks have hit the ground running in 2019, and Canopy Growth (NYSE: CGC) has been one of the best performers so far this year in the cannabis industry. With a powerful combination of a high-growth business and the support of partner and major shareholder Constellation Brands (NYSE: STZ), Canopy is an early leader in the budding marijuana business.

Canopy Growth expects to release its fiscal third-quarter financial report on Thursday, Feb. 14, and investors are looking forward to getting their first reading on how the company has fared following the opening of the lucrative Canadian market to recreational cannabis sales. In particular, most expect Canopy's revenue to soar -- but the big question will be whether it can also make moves toward eventual consistent profitability as it grows.

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Delayed gratification for Canopy Growth investors

Many of those who follow Canopy Growth expected that they'd see a big jump in revenue during the fiscal second quarter that ended last September. Even though that quarter ended before the Canadian recreational cannabis market opened, many still believed that advance shipments of cannabis products would show up in those quarterly results. Yet the actual results showed only marginal gains of about 33% in its top line, and huge losses stemming from a combination of rising expenses, stock-based compensation, and adjustments to the value of convertible debt that the company has outstanding.

Fundamentally, though, Canopy's results showed its readiness for the big leagues. Even though sales volumes of cannabis were restrained, production soared, as Canopy harvested more than 15,000 kilos of cannabis during the period, up from just over 4,000 kilos in the same period a year earlier. Canopy also succeeded in sustaining its pricing power, demonstrating the value of the brands that it's put into place at a key time for the industry.

As a result, many investors will look closely at how well the Canadian rollout went for Canopy. Signs of strong sales will be rewarded, but any hint of weakness could disappoint shareholders who've already waited three months longer than they wanted to see the signs of success in the Great White North.

Looking forward

Yet the bigger question for many investors in Canopy Growth is exactly how quickly it can capitalize on what most see as a much larger long-term opportunity. In January, following the legalization of hemp production in the U.S. Farm Bill, Canopy said that it would build a production facility for hemp in upstate New York. The huge project involves a $150 million investment, but the most important part of the move is that it establishes an entry point for Canopy to get involved in what could become a major part of the U.S. market for cannabis-related products. Details on the timing and extent of the project will be crucial in helping to establish expectations, but investors will inevitably have high hopes that Canopy will be a first-mover in this part of the industry as well.

At the same time, shareholders should also focus on the continuing relationship between Canopy and Constellation Brands. Already, Constellation has made it clear that it sees huge growth potential in marijuana, and the beer and spirits company is counting on its investment in Canopy to produce strong returns that justify its faith in the cannabis industry.

Constellation has the power to help Canopy Growth immensely, both by using its existing distribution networks and marketing expertise and by providing capital as necessary to fund expansion. Canopy CEO Bruce Linton speaks assertively about his company's ability to grow on its own, but it's in both Canopy's and Constellation's interest to work together toward the common goal of attaining domination of the budding marijuana industry.

Expect more growth

Canopy Growth will see several of its peers report their results, and comparisons are inevitable. With the advantages that it has, though, Canopy should be able to remain near the top of the industry with a vision that should take full advantage of the prospects for greater availability of legal cannabis in the months and years to come.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.