Canopy Growth Corporation (CGC) is an Ontario-based legal cannabis company. With a history dating back to 2013, Canopy is both one of the oldest and one of the largest cannabis companies in operation by market capitalization. Late in 2018, Canopy Growth was bolstered by a $3.8 billion investment by beer, wine and spirits producer Constellation Brands (STZ), with Canopy using the added cash to fuel continued international expansion. Early in 2019, Canopy announced it would expand its medical marijuana branch Spectrum Cannabis into international markets in Poland and the U.K.
Investors have eagerly awaited financial reports from Canopy and other major cannabis companies since Canada's move to legalize recreational marijuana in October of 2018. On February 14, 2019, Canopy released consolidated financial results for the third quarter of FY19 to the public via press release. Below, we'll explore and analyze these results.
Big Gains in Some Areas
One of the first takeaways from Canopy's Q3 FY19 results is that some figures have changed tremendously over a year prior. In this period, for instance, Canopy reported net revenue of $83 million, versus $21.7 million in Q3 of 2018. Kilograms and kilogram equivalents sold more than tripled over the same window, with 10,102 kilograms as the figure for Q3 2019. Canopy also doubled its inventory and biological assets, ending Q3 of 2019 with $216 million in these supplies. Most impressively, perhaps, cash, cash equivalents and marketable securities jumped by more than tenfold to $4.92 billion, likely largely due to the Constellation Brands investment.
What It Means
For Canopy, the new figures mean that this company enjoys more than double the market share of its closest rival, Aurora Cannabis (ACB). Revenue of $83 million for the quarter surpassed many analysts' expectations. Simply put, Canopy has emerged as perhaps the single most dominant player in the legal cannabis game, thanks in large part to a surge in key figures post-legalization in Canada.
However, Canopy is not without its potential concerns as well. The company's gross margins fell relative to some rivals' figures (Canopy's declined to 22%, as compared with Aurora's 52% figure, for instance). Operating costs remain high, and free cash flow declined to a deficit of $293 million. All of this is to say that investors who were concerned about Canopy's rapid expansion plan still may have reason to remain skeptical. It's unlikely that the company will be able to generate earnings which hold up to its massive valuation for some time.
Still, Canopy Growth leaders believe that these are manageable concerns. For one thing, as the financials report indicates, greenhouse facilities used to produce cannabis have not yet reached full capacity. The company has also incurred additional costs aiming to get ahead in the edible and beverage areas of the cannabis market. Canopy believes that these costs will level out as greenhouse facilities reach full utilization and edibles and beverage products can be introduced to market later in 2019. Further, in a fledgling industry like legal cannabis, there has been rampant expansion among a variety of competitors. These eager companies have all bet that stretching their cash now will set them up for global dominance in the future. Of course, not every company which aims to assert itself early on in the industry's lifetime will meet with success. The most recent figures suggest Canopy may be on track to do just that.