By Ciara Linnane, MarketWatch
Cannabis stocks resumed their selloff on Monday in a continued response to last week’s disappointing earnings from industry leader, Canada’s Canopy Growth Corp., the biggest company in the sector measured by market capitalization.
Canopy shares /zigman2/quotes/200603886/composite CGC -3.55% /zigman2/quotes/202205609/delayed CA:WEED -2.79% fell 3.3% in early trade to bring their month-to-date losses to 12.5%, after fiscal fourth-quarter earnings showed declines in recreational sales of cannabis from the previous quarter and higher-than-expected costs.
“We’re still seeing the Canopy report spill over into the sector as people work their way through the numbers,” said Korey Bauer, portfolio manager of the Cannabis Growth mutual fund /zigman2/quotes/208282024/realtime CANNX -2.81% recently launched by Foothill Capital Management. “There was some disappointment about how much they’re spending and international is not as impressive as hoped, but time will tell. We have the edibles rollout in Canada coming in the (calendar) fourth quarter and Canopy is expecting that to be a big revenue provider.”
Analysts weighing in on the numbers on Monday took a mixed view with BMO Capital Markets’ Tamy Chen reiterating a neutral rating on Canopy stock amid concerns about margins and the operating expenditures needed to ramp value-added manufacturing in fiscal 2020.
Canopy’s gross margins shrank to 16% from 22% in the third quarter and were well below BMO’s estimate of 29%.
“We had previously projected that retrofits at the company’s B.C. greenhouses would be completed in FQ3/19; however, the company indicated that these retrofits continued into FQ4/19, which negatively affected margins,” Chen wrote in a note to clients. “Looking ahead, we believe the gross margin should improve as we observed material improvements when we visited the B.C. greenhouses in May.”
Benchmark analyst Mike Hickey highlighted the continued supply issues that weighed on recreational and medical cannabis sales in the quarter, but remained bullish on the company’s longer-term prospects.
“Canopy offers us the clearest construct on how to build meaningful share in the global cannabis market and has the executive talent and capital to orchestrate on that vision; we are less focused on near term profitability considerations as they scale into future sales growth,” he wrote in a note.
Benchmark continues to rate the stock a buy with stock price target of C$100 ($76), that is almost double its current trading level.
Canopy co-Chief Executive Bruce Linton defended the company’s losses in an interview with MarketWatch’s Max A. Cherney on Friday, saying that the company’s stock compensation practices were partly to blame—but that’s a good thing.
“If we had zero stock-compensation loss, we would have a much lower loss and a much worse company,” he said. “It’s an accounting element that I don’t think makes people appreciate the value of options, that I’m hugely in favor of.”
Also Monday, Canopy Growth said that it had received a license to grow cannabis from Health Canada and had begun planting crops “hours” after receiving approval. The 160 acre site is patrolled by drones and located in Saskatchewan.