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Canopy Growth: Should You Give Up or Hold On?

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All eyes were on a cannabis company based in Ontario, Canada canopy growthit is (NASDAQ: CGC) results for the fourth quarter of fiscal 2020 – especially after Aurora Cannabis (NASDAQ:ACB) upped the ante with impressive revenue growth in the third quarter. But Canopy’s results weren’t up to snuff, and investors are skeptical.

What went wrong?

Various aspects of Canopy’s fourth quarter results were less than ideal. For starters, it missed analysts’ earnings estimates by a huge margin. Net losses were also higher than expected, with adjusted EBITDA (earnings before tax, depreciation and amortization) losses amounting to C$102 million. Lower sales and higher operating expenses contributed to the losses.

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Lower recreational marijuana sales in Canada resulted in a 13% decline in net revenue compared to the third quarter of 2020. On the positive side, revenue in the quarter was up 15% year-over-year to reach C$107.9 million, up 76% for the year as a whole.

Management said on the earnings call that their “supply chain struggled with complex products and production systems [in] a very dynamic market with changing demand and evolving consumer preferences” during the quarter.

Management’s decision to close 22 of its company-owned Tokyo Smoke and Tweed retail stores across Canada in mid-March is also impacting revenue. Those stores have now reopened, but I’m afraid Canopy may have slightly missed the surge in demand for cannabis amid the pandemic. Canada already has a shortage of legal stores – and closures during a time of continued demand could affect sales.

Strategies to reduce cash burn

When a company misses consensus estimates and reports below-average results, investors can ignore everything that’s going on behind the scenes. It may interest you to know that Canopy is working to reduce its cash burn and right-size its cost structure. For example, it exited its operations in South Africa and Lesotho and closed one of its indoor facilities in Yorkton, Canada, as management is confident that its production capacity in Canada is more than sufficient to meet the request.

To shift to an asset-based approach, it also ceased operations at its grow facility in Colombia and its farming operations in New York. Instead, it will use its existing hemp supply to produce hemp-derived CBD products for the US market. The CBD space in the United States is a growing market that is only expected to expand further as the United States Food and Drug Administration (FDA) continues to move forward in its evaluation of CBD.

These strategies could help Canopy reduce costs, which could be essential; after all, an asset-based approach helps Chronos Group (NASDAQ: CRON) surviving the pandemic with a strong balance sheet.

A year of change

Management said fiscal 2021 could be a year of transition, which could disappoint investors. Constellation Brands (NYSE: STZ) owns nearly 40% of Canopy, and under former Constellation executive David Klein, Canopy is expected to see a new organizational design, new operational programs and advances in supply chain productivity. These changes could prove to be significantly beneficial.

Watch how Aphria (NASDAQ: APHA) CEO Irwin Simon has transformed his business – I guarantee it as a solid cannabis pick for 2020. I know why investors who expected Canopy to be a market leader in the cannabis space might be spooked now, but despite the challenges, cannabis stocks did well last month; if demand holds, the long-term outlook could be fruitful. Shares of Canopy Growth, Aurora Cannabis, Aphria and Cronos gained 14%, 67%, 28% and 16% respectively in May, while SPDR S&P 500 ETF (NYSEMKT: SPY) gained 7.6%.

Ups and downs in the industry

Note that marijuana is always an evolving and volatile industry, and the ups and downs are evident. Canopy Growth continues to benefit from strong financial backing from Constellation Brands, as well as an excellent portfolio of innovative products. It recently launched its most recent phase of cannabis 2.0 products, including vapes, chocolates and cannabis-infused drinks.

The task of the management is now to develop a fast and effective strategy when rolling out these new products, which still have enormous potential to conquer the market now that demand is stronger. Cannabis-infused drinks already launched are garnering good reviews, and these innovative products may end up attracting a whole new clientele. Now, with research indicating that some cannabis strains can help fight COVID-19, the potential for marijuana industry is higher than ever.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.