What Happened

Canopy Growth Corp. published earnings on November 14, and it was not pretty. Losses per share were roughly three times higher than expected and revenue came in substantially below expectations. As of noon on the day of the announcement, the stock already had plunged as much as 16%. Canopy's free cash flow wasn't any better and was down sharply. The cannabis company will need to raise substantially more funds from investors to finance its ambitious growth plans.

(Below is Investopedia's original earnings preview, published 11/5/19)

What to Look For

Cannabis giant Canopy Growth Corp. (CGC) has faced a difficult year in 2019, with mounting losses as industry sales of medical and recreational marijuana missed analyst expectations. Given the company's losses, a key metric that investors will be watching for as Canopy Growth reports earnings on November 14, 2019 is free cash flow, or cash available after outflows to support operations and capital assets. In the past 12 months, Canopy Growth stock has dramatically underperformed the S&P 500, falling by more than 52% during that time. In the most recent quarter, Canopy's stock slid immediately following its announcement of results, which included a surprising decline in revenue. For Q2 2020, analysts expect the company to narrow its GAAP losses per share as revenue more than quadruples compared to the same quarter a year ago. All dollar values below are USD.

One Year Total Return for S&P 500 and Canopy Growth
Source: Trading View.

Despite a string of losses in both Q2 2018 and Q2 2019, Canopy Growth has seen steady increases in revenue during those quarters. On a year-over-year basis, EPS has moved in the opposite direction, declining somewhat from fiscal Q2 2017 to Q2 2018, then precipitously in fiscal Q2 2019. For the most recent quarter of Q1 2019, Canopy Growth reported GAAP losses per share of -$2.80, its worst quarterly results ever. That represented a downside surprise of close to -761%. At $68.46 million, revenue was also lower than anticipated last quarter as well, with a downside surprise of just under 19%.

Canopy Growth Key Metrics
  Estimate for fiscal Q2 2020 Fiscal Q2 2019 Fiscal Q2 2018
Earnings Per Share -$0.27 -$1.15 -$0.01
Revenue (in millions) $83.45 $17.84 $14.02
Free Cash Flow (in millions) N/A -$207.00 -$22.35
Sources: YCharts and Canopy Growth

Canopy Growth has been unique among cannabis companies because of a $4 billion investment it received from beverage producer Constellation Brands Inc. (STZ) in August 2018. However, in spite of that influx of capital, Canopy Growth has been plagued by difficulties managing cash flow, a problem shared by many other businesses in the cannabis space. Legal cannabis is a new industry and companies like Canopy Growth are typically saddled with enormous expenses on equipment, facilities and other assets.

For that reason, free cash flow, which factors in this type of spending, is a useful measure of profitability for companies in this field. Unfortunately for Canopy Growth, its free cash flow figures have been heading in the wrong direction. The company has seen a nearly ten-fold decline in free cash flow from -$22.35 million in fiscal Q2 2018 to -$207.00 million in fiscal Q2 2019. That number worsened in the last quarter, when the company reported free cash flow of -$277.88 million. The free cash flow figures starkly highlight the challenge Canopy Growth faces in becoming profitable on a sustained basis.