Key Takeaways

  • Analysts estimate adjusted EPS of CA-$0.42 vs. CA-$3.83 in Q1 FY 2020.
  • Free cash flow is expected to improve YOY, but is still expected to be negative
  • Revenue expected to post strong gain, but slower than a year earlier.

Canopy Growth Corp. (CGC) has seen its financial losses expand dramatically in recent years as it sacrificed profits to grow in the burgeoning marijuana sector. This trend continued when it posted a giant net loss, totaling CA-$1.3 billion, and a slowdown in revenue growth in Q4 FY 2020 ended March 31. In reporting the results, Canopy Growth said that it “no longer strives to be first to every market” in the cannabis space, and instead will focus on cost cutting and a more narrow offering of cannabis products.

Investors will watch to see if Canopy Growth can reverse its losses when it reports Q1 FY 2021 earnings on August 10. Expectations are for a mixed quarter, with higher revenue and narrowing losses year-over year (YOY). Analysts estimate Canopy Growth will post CA-$0.42 in adjusted earnings per share (EPS), which is equal to -$0.31 using the CAD/USD exchange rate on August 1. Canopy Growth’s fiscal year ends in March.

One metric that is particularly important to many Canopy Growth investors is free cash flow (FCF). Many analysts see FCF as a critical factor in determining whether Canopy Growth will be successful in positioning itself for sustainable long-term profitability. For Q1 FY 2021, analysts expect the company's negative free cash flow to shrink sharply compared to a year earlier.

Over the past 12 months as of July 31, Canopy Growth has lagged the S&P 500 by a significant margin, posting a total return of -44.0% compared to 9.8% for the index. Please note that this article refers to diluted earnings per share figures as "adjusted earnings per share."

Canopy Growth (CGC) vs. S&P 500
Source: TradingView.

Canopy Growth's shares have struggled in recent months, declining in the days following their Q4 FY 2020 earnings release in late May. Shares traded sideways for most of June and July, although they spiked 20% between July 24 and July 28.

Looking forward to the company’s Q1 FY 2021 results, analysts expect revenue of CA$137.5 million, a 52% increase from a year earlier. While this is faster than the YOY increases in Q3 and Q4 of FY 2020, it's still a dramatic slowdown from the 249.1% YOY growth a year ago, in Q1 FY 2020. The promising news may be on the bottom line. Analysts expect Canopy Growth's losses to narrow dramatically. They estimate adjusted EPS of CA-$0.42, which is more than nine times smaller than the loss a year earlier, when it reported CA-$3.83 for Q1 FY 2020.

Canopy Growth Key Metrics
  Estimate for Fiscal Q1 2021 (CA$) Actual for Fiscal Q1 2020 (CA$) Actual for Fiscal Q1 2019 (CA$)
Adjusted Earnings Per Share -0.42 -3.83 -0.40
Revenue 137.5M 90.5M 25.9M
Free Cash Flow -201.2M -370.1M -221.3M

Source: VisibleAlpha

As indicated earlier, one metric that is of particular concern to Canopy Growth analysts and investors is free cash flow. As a new and growing industry, cannabis companies like Canopy Growth must spend significant amounts of money on new equipment, facilities, and administrative expenses. Since Canopy Growth is growing rapidly and is still trying to become profitable, it also needs to ensure that it doesn't burn through its cash.

Canopy Growth has struggled with FCF, having reported negative free cash flow for 16 straight quarters through Q4 FY 2020. In its most recent Q4 FY 2020 filing, for example, Canopy Growth reported free cash flow of CA-$304.7 million. While this figure did represent a year over year improvement of 21.7%, it was still more than 150% bigger than the company's CA$120 million revenue for the quarter. Thus, the company is a long way from producing positive free cash flow. This comes in the midst of ongoing layoffs and other cost-cutting efforts at Canopy Growth, which contributed to $743 million in restructuring and impairment charges in Q4 FY 2020.

Analysts expect Canopy Growth’s free cash flow to narrow by nearly half in Q1 FY 2021, but it is still expected to come in at CA-$201.2 million. So even if Canopy Growth meets expectations, it still has a long way to go to prove its business model is sustainable.