By Ciara Linnane, MarketWatch
Canopy Growth stock roared higher Friday and sparked a broad rally among cannabis stocks, after a better-than-expected earnings report bolstered sentiment on the beaten-down sector.
The report is a “beacon of hope” for the sector, said MKM analyst Bill Kirk.
Canopy shares /zigman2/quotes/200603886/composite CGC +0.52% /zigman2/quotes/202205609/delayed CA:WEED +0.41% rocketed 18% in morning trading, putting them on track for their biggest gain in 18 months, after the company posted a narrower-than-expected fiscal third-quarter loss and revenue that rose above forecasts, amid strength in business-to-consumer sales. The company reported a net loss of C$124.2 million ($93.8 million), or 35 cents a share, after net income of C$74.9 million, or a loss of 38 cents on a per-share basis. That beat the FactSet consensus for a loss of 52 cents a share.
Net revenue rose 49% to C$123.76 million ($93.46 million), above the FactSet consensus of C$105.0 million. Recreational business-to-business cannabis sales fell 11% to C$53.5 million, as a 42% increase in dry cannabis sales was offset by an 86% drop in oil and softgels.
Recreational business-to-consumer cannabis sales increased 32% to C$15.2 million, as dry cannabis sales grew 24% and oil and softgels jumped 183%. Canadian medical cannabis sales fell 7% to C$14.8 million and international medical sales rose nearly sevenfold (up 593%) to C$18.7 million.
“We had expected only small improvements from the prior quarter, but Canopy is showing a meaningful progression,” Kirk wrote in a note to clients.
Still, the company’s path to profitability remains unclear and Kirk is waiting for the earnings call for details on Cannabis 2.0, the second phase of Canadian legalization that allows derivatives, including edibles and beverages.
“We doubt early 2.0 sales will be a significant contributor given the lack of activity observed at production facilities two weeks before 2.0 legalization,” he wrote. “We continue to rate WEED shares neutral.”
On the company’s earnings call with analysts, new Chief Executive David Klein said he has started a full review of the company’s footprint to help define a path to profitability. The executive, who came to Canopy from its biggest shareholder Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ +2.78% , said the company will take the first steps to right-size the business in the next 90 days.
“[W]e need to align our resources and investments with the size and growth rate of the market as it exists today,” Klein said, according to a FactSet transcript.
Aurora Cannabis shares /zigman2/quotes/210559470/composite ACB -2.24% /zigman2/quotes/203734337/delayed CA:ACB -2.25% rose 5%, a day after the company reported a more than C$1 billion quarterly loss. That news was widely expected, however, after Aurora unveiled a major overhaul of its management and operations last week. The company’s new interim Chief Executive Michael Singer is now tasked with turning the company around, instilling a culture of discipline and driving it to profitability, said Ladenburg Thalmann analyst Glenn Matson.
“We continue to view the near-term revenue challenge as an industry problem that will correct itself in the next few quarters,” Matson wrote in a note. The analyst continues to rate the stock a buy, although he lowered his price target to $3 from $4.