Key Takeaways

  • EPS was -CA$0.09 vs. the -CA$0.38 analysts expected.
  • Revenue exceeded analyst expectations.
  • Free cash flow missed analyst estimates.
  • On November 3, 2020, voters in New Jersey, Arizona, and Montana approved ballot measures to legalize recreational marijuana, and Mississippi has voted to legalize medical marijuana use. South Dakota, approved ballot measures to approve both.

What Happened

Canopy Growth posted a loss per share that beat analysts' expectations by a wide margin in Q2 FY 2021. Strong revenue growth also helped revenue surpass estimates. The company achieved record quarterly net revenue. Free cash flow, however, missed expectations. The company noted that it was working to implement initiatives that would bring cost savings of around CA$150 million to CA$200 million in cost savings as it moves closer to profitability.

(Below is Investopedia's original earnings preview, published November 4, 2020.)

What to Look For

Canopy Growth Corp. (WEED.TO) could receive a boost from a Democratic win in the presidential election. Both presidential candidate Joe Biden and his running mate, Kamala Harris, while not supportive of federal legalization, are sympathetic to looser cannabis regulation. Voters in New Jersey, one of among several states that had marijuana-legalization initiatives on their ballots, voted on Nov. 3, 2020 to authorize the legal use of recreational marijuana. 

While investors await the outcome of the election, they will closely watch Canopy Growth's financial performance when the company reports earnings on November 9, 2020 for Q2 FY 2021. The company's fiscal year (FY) ended in March. Analysts expect strong revenue growth as the company reports another loss per share for its Canadian shares. Its U.S. shares trade under the ticker CGC.

Investors will focus on free cash flow, one of Canopy Growth's key metrics. Free cash flow measures a company's ability to generate cash in excess of its operational needs and capital expenditures (CapEx), an important indicator of profitability. Analysts expect a significant year-over-year (YOY) improvement in free cash flow.

Shares of Canopy Growth have made erratic swings over the past year, sometimes outperforming the broader market but mostly underperforming. Despite rising about 90% from its March lows after crashing with the broader market, the stock has provided a total return of only 1.5% over the past 12 months, below the S&P 500's total return of 9.5%, as of November 3, 2020.

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

The stock fell after Canopy Growth reported Q1 FY 2021 earnings results on August 10 and continued to decline until early October. For Q1, the company posted a loss per share of CA$0.30 ($0.23), an improvement from the loss per share of CA$0.54 posted in the year-ago quarter. Revenue grew 22.0% YOY, an acceleration from the previous quarter but a much slower pace than in any other quarter since at least Q1 FY 2018.

The company's shares fell sharply after the company released its Q4 FY 2020 earnings report before markets opened on May 29, 2020.  Canopy Growth posted a loss per share of CA$3.72, the biggest loss since at least Q1 FY 2018. Revenue rose 14.7%, its slowest pace since at least Q1 FY 2018. The company's shares traded essentially sideways over the next two months through early August, then drifted downward until early October.

Since early October, the stock has made dramatic moves higher. Analysts expect Canopy Growth to post another loss per share in Q2 FY 2021. At a loss of CA$0.38 per share, it would be a significant deterioration from earnings per share (EPS) of CA$0.25 posted in the year-ago quarter. Analysts are forecasting revenue to rise a robust 53.0%, continuing its sequential acceleration that began in the previous quarter.

Canopy Growth Key Metrics
  Estimate for Q2 2021 (FY) Q2 2020 (FY) Q2 2019 (FY)
Earnings Per Share (CA$) -0.38 0.25 -1.43
Revenue (CA$) 117.2 M 76.6 M 23.3 M
Free Cash Flow (CA$) -154.8 M -442.1 M -270.0 M

Source: Visible Alpha

As mentioned, investors are likely to focus on Canopy Growth's free cash flow (FCF). All companies need to generate cash in order to pay for their operational activities and purchases of plant, property, and equipment (PP&E). If a company can generate cash in excess of those expenditures -- positive FCF -- then it can use that excess to pay creditors and possibly dividends to shareholders. If FCF is negative, then the company will be running down its cash reserves and may eventually need to tap creditors in order to continue financing operations. For new companies focused on growth and with high capital expenditures, a certain amount of cash burn is expected, but it's not a sustainable long-term strategy.

Canopy Growth has reported negative FCF since at least Q3 FY 2017, when it reported FCF of -CA$13.1 million. Since then, FCF worsened dramatically, reaching a bottom of -CA$442.1 million in Q2 FY 2020. FCF has improved substantially since then, reaching -CA$180.1 million in the first quarter of the company's current FY. Analysts expect it to improve further, to -CA$154.8 million in Q2 FY 2021, as the company strives to become profitable. For all of FY 2021 ending March of next year, analysts estimate the company will report FCF of -CA$494.1 million.