Canopy Growth Corp. (CGC) is causing strife for investors Friday, as quarterly losses widened substantially in the fiscal fourth quarter of 2019. The stock is down about 8% in response. It should not come as too much of a shock to investors, as the share pricing has been highly speculative from the start. The impact of investments from Constellation Brands (STZ) , along with the very high digit revenue growth that most Canadian cannabis producers have put together thanks to legalization of the recreational market, have provided the catalysts for the stock. If investors want meaningful earnings behind the stock price, it seems they'll be waiting a while.
To say that Canopy went the other direction in terms of improving earnings would be an understatement. Canopy Growth's net losses increased to C$323.4 million ($245.48 million) compared to a loss of C$54.4 million ($41.3 million) last year. That's a 494% increase year over year. There are two ways to view this loss. On the one hand, a fair piece of the loss was related to convertible debt rules that take into account the company's stock price growth. You'll find it on their financial statements as $133.45 million in "other net expenses." That's a significant portion of the quarter's losses. On the other hand, Canopy Growth did not have positive operating income. Operating losses increased from C$51.01 million ($38.6 million) in fiscal 2018 to C$174.46 million ($131.9 million) in Q4 fiscal 2019.
This is the continual problem with most marijuana names. They've increased their costs so much in the effort to produce enough supply to take advantage of the new market, and these sorts of losses are going to happen. I've said before that I think it's going to take until this fall for us to see the real winners and losers. After hitting their revenue and supply needs, these companies will have to streamline themselves. That'll take a few quarters of learning where the balance is. In waiting, investors are going to gamble some pretty substantial premiums for these stocks.
On the plus side, Canopy Growth continued to grow revenues at a very high rate. Net revenue increased 313% year over year in the fiscal fourth quarter to C$94.1 million ($71.2 million). This represented a sales beat over analyst estimates of C$90.6 million ($68.5 million).
There also seems to be some concern over a reported decrease in Canadian recreational sales year over year. Sequential recreational sales decreased to C$68.9 million ($52.1 million) in the fourth quarter compared to C$71.6 million ($54.1 million) in the fiscal third quarter. Personally, I'm not overly concerned about this. Many factors including production and harvest rates could impact those figures. One quarter does not a trend make, and I certainly won't use that small decrease in recreational sales as a statistical indicator that recreational demand is shrinking.
A new market must be viewed from a macroeconomic standpoint. If you're in a stock like this, you've got to play the long game. That's going to take more time than just a few quarters of recreational sales. Thanks in large part to the investment from Constellation Brands STZ, Canopy reported C$4.5 billion ($3.4 billion) in cash/securities at the end of the quarter. This company is one of the best capitalized firms in the industry. They can afford to take some losses in their aggressive attempts to build up their infrastructure.
Now, if it's the expensive stock price that one is worried about, that's another story. Yes, Canopy Growth is expensive. Almost all of the Canadian LP's are priced at big speculative prices relative to their actual earnings (if they have any). I don't own Canopy Growth, and suspect that there could be further downside on the way if I'm right in terms of my timeline for when these companies might start showing some actual earnings. In terms of the company's business, I wouldn't get overly worked up over the quarter. The company has plenty of cash, and through their relationship with Constellation Brands, Canopy's management should have access to some pretty good consultation.
What it really comes down to is whether investors want to pay the premium before they get proof that the company can make money.