Canopy Growth shares slid 14% Thursday, after the world’s biggest cannabis company reported a more than billion Canadian-dollar loss for its latest quarter and missed revenue estimates, dealing another blow to the troubled sector.
“Quick word: Negative,” is how Stifel analyst Andrew Carter summed it up in a note to clients.
The Smiths Falls, Ontario-based Canopy CGC, -14.41% WEED, -15.27% made headlines this summer when it fired co-Chief Executive Bruce Linton, amid reports that major investor Constellation Brands was unhappy with the company’s slow progress toward profitability. It has kept on current CEO Mark Zekulin, although he expects to exit once a new chief has been found.
Canopy posted a loss of C$1.28 billion ($959.9 million), or C$3.70 a share, compared with losses of C$91 million, or 40 cents a share, in the year-ago period. The more than $1 billion loss was due to the company extinguishing warrants related to Constellation’s $4 billion investment.
Net revenue rose to C$90.5 million from C$25.9 million in the year-ago period, excluding excise taxes. Analysts surveyed by FactSet were expected a loss of just 38 cents a share on revenue of C$111.9 million.
Stifel’s Carter said he was expecting C$103 million of revenue, and that forecast assumed the company was burdened by executional issues.
“We believe the recent (7/2/19-present) underperformance for the shares following Bruce Linton’s termination (-20%, S&P 500 -4.5%) contemplated a difficult performance, and the focus of tomorrow’s earnings call will be on Canopy’s ability to return to leading category growth,” he wrote in a note to clients, referencing Thursday’s conference call with analysts.
Still, “ we believe Canopy remains in a strong position with all the resources to regain its footing, but proof points are necessary for a more robust performance for the shares,” the analyst wrote. Stifel is sticking with a buy rating on the stock for now, and a C$50 price target that is 31% above its current price.
Piper Jaffray analysts struck a similar tone.
“We recognize there are challenges and growing pains that come with the creation of a new and highly regulated industry, and we expect to hear more on the conference call on the likely revenue cadence and margin progression over the remainder of F2020,” analysts led by Michael Lavery wrote in a note to clients. Piper also rates the stock the equivalent of buy and has a price target of $54, which is 86% above the current U.S.-listed stock price.
Canopy booked an allowance for returns of oils and softgels of C$6.4 million, which are facing oversupply as dry flower continues to suffer shortages, highlighting the importance of second wave products, which are coming to the Canadian market in December or January, the analyst wrote.
“In the meantime, softgel products could be a drag on mix, since they are higher priced (per gram) and higher margin products and appear to not be selling,” Lavery wrote. “Lack of consumer interest in oils and softgels is consistent with our channel checks, where we have seen an abundance of these products despite shortages of dry flower.”
Elsewhere in the sector, shares of Aurora Cannabis ACB, -6.90% ACB, -6.54%, the most widely held of the Canadian licensed producers, were down 2.9% after the company said it has increased the size of a credit facility to C$360 million from C$200 million.
Just last month, a BofA Merrill Lynch analyst downgraded Aurora in a note that questioned the rate at which it was burning cash. Analyst Christopher Carey said the company would likely need funding some time in the next few quarters, noting it has C$230 million of convertible debt that matures in the first quarter of 2020, and that may need to paid in cash, if the stock fails to rally sharply between now and then.
Tilray shares TLRY, -10.04% fell another 10%, in a continued response to earnings released Tuesday, that showed losses that were wider than expected but revenue that was greater than expected. Alliance Global Partners said they still expect top-line and margin improvement in 2020 as new form factors come on line and international sales and CBD become bigger contributors to sales.
“While we believe management’s long-term outlook on the market and profitability is appropriate given aspirations to be a global leader in the space, we believe the stock’s premium multiple reflects leadership position and as a result, we maintain our neutral rating and $50 price target,” analyst Aaron Grey wrote in a note.
The Horizons Marijuana Life Sciences ETF HMMJ, -7.29% was down 4%, with 46 of its 54 member stocks declining. The ETFMG Alternative Harvest ETF MJ, -5.46% was down 3%, with 23 of its 36 members falling.