Canopy Growth (NYSE:CGC) shares rose by over 15% intra-day when it posted Q3 EPS and revenue beating consensus estimates. Revenue grew 49% Y/Y while it reported a GAAP EPS loss of $0.35. Flush with $2.3 billion in cash, Canopy will survive but its stock will not reward investors with gains in the near-term.
The cannabis industry is facing a slowdown and deteriorating pricing.
Just as oil prices fell and hurt heavily indebted firms, cannabis companies with too much debt will close down. Canopy is an exception.
It has billions in cash that it may use to cushion the quarterly EBITDA losses.
Canopy’s play is simple: grow revenues at a faster rate than costs. Its first priority of improving its connection with customers is a basic business requirement. Its second priority of cost controls, through focus and discipline, is not an option.
The industry is facing uncertainties and only 2.0 products, more store openings in Ontario and legalization worldwide will shrink losses.
Constellation Brands (NYSE:STZ) already wrote off ~$500 million from its investment in Canopy Growth. More importantly, installing its own management team to oversee operations may pay off in the long-term.
So, after Canopy wrote-off $1.2 billion in the last quarter related to warrants, the company has a clean balance sheet. With no more surprise write-downs ahead, CGC stock is stable.
Looking ahead, it will need consistently strong revenue growth in 2020 to ignite a sustained rally.
