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Feb. 19, 2020, 7:21 a.m. EST

Canopy Growth extends gains, but analyst highlights issue that was overlooked in earnings

Canopy’s better-than-expected revenue overshadowed one issue that will weigh in future quarters

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By Ciara Linnane, MarketWatch


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Canopy Growth Corp.’s U.S.-listed shares rose Monday, extending gains made Friday after the Canadian cannabis company surprised investors with better-than-expected earnings.

The stock /zigman2/quotes/200603886/composite CGC -3.16%   /zigman2/quotes/202205609/delayed CA:WEED -2.63%  was up 1.6% and was outperforming rivals after the company beat revenue estimates in its fiscal third quarter. The Friday report sparked a rally across the sector that had lost steam by Monday as the broader indexes were hit by a warning from Apple Inc. /zigman2/quotes/202934861/composite AAPL +3.16% that the coronavirus that has sickened thousands of people in China would hurt second-quarter earnings.

The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.86%  was last down 0.7%, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.90%  was down 0.4%.

But not all analysts were bullish on Canopy on Monday, with MKM analyst Bill Kirk highlighting an issue that was overshadowed by Friday’s headline numbers: inventory. Since the end of 2017, Canopy has grown 115,000 more kilograms of cannabis than it has sold, he said.

Don’t miss: Why Canopy Growth’s sales grew as Aurora Cannabis struggled to sell more weed

“On an annual basis, the entire Canadian legal market is ~180,000kgs (run rate), suggesting Canopy carries >50% of industry wide needs for the year (some may be CBD inventory in U.S.),” Kirk wrote in a note to clients. “Assuming Canopy ceased all growing operations AND maintained current market share, it would take ~2.5 years to sell this product in Canada.”

Adding to the gloom, Canopy indicated that its current inventory levels may not have peaked, suggesting it has a lot of product that consumers just don’t want.

“We expect large write-downs/destruction/price concessions,” said Kirk. “Canopy doesn’t want to participate in price competition, but to unlock cash from this inventory balance, they may have no choice. Net sales growth is unlikely to accelerate enough to match current production levels, so facility closures are also necessary.”

Kirk rates Canopy as neutral and lowered his fair value estimate for the stock to C$21 ($15.84) from C$23.

Read now: Why Canopy Growth’s sales grew as Aurora Cannabis struggled to sell more weed

Aurora Cannabis shares /zigman2/quotes/210559470/composite ACB -0.31%   /zigman2/quotes/203734337/delayed CA:ACB 0.00%  were up 2.7%. The company posted a more than C$1 billion loss last week, although the news was expected after it unveiled an overhaul of management and operations a week earlier.

British Columbia Investment Management purchased 1.2 million Aurora shares in the fourth quarter, according to a filing with the Securities and Exchange Commission, raising its total by year-end to 1.4 million shares.

Read: From cash to ash: Pot companies have just months to live on average, study finds

But the other big licensed producers were lower, led by Cronos /zigman2/quotes/206842762/composite CRON +1.57% , down 1.2%, Aphria   down 0.9% and Tilray /zigman2/quotes/209129655/composite TLRY -1.27%  down 0.8%. Organigram /zigman2/quotes/209289540/lastsale OGI +1.49%  was up 1.7% and Hexo /zigman2/quotes/206508254/composite HEXO -0.89%   /zigman2/quotes/200008967/delayed CA:HEXO +0.71%  was down 3.3%.

The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -1.71%  was down 0.4%, while the Horizons Marijuana Life Sciences ETF /zigman2/quotes/208856346/delayed CA:HMMJ -2.37%  was down 0.7%.

Cannabis Watch: For all of MarketWatch’s coverage of cannabis companies: Click here

/zigman2/quotes/200603886/composite
US : U.S.: Nasdaq
$ 10.71
-0.35 -3.16%
Volume: 9.46M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$4.34 billion
Rev. per Employee
$126,876
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/zigman2/quotes/202205609/delayed
CA : Canada: Toronto
$ 13.72
-0.37 -2.63%
Volume: 3.55M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$5.55 billion
Rev. per Employee
$167,735
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 165.30
+5.06 +3.16%
Volume: 167.91M
Nov. 30, 2021 4:00p
P/E Ratio
29.48
Dividend Yield
0.53%
Market Cap
$2628.96 billion
Rev. per Employee
$2.38M
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
34,483.72
-652.22 -1.86%
Volume: 654.35M
Nov. 30, 2021 4:20p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
4,567.00
-88.27 -1.90%
Volume: 3.94B
Nov. 30, 2021 4:20p
loading...
/zigman2/quotes/210559470/composite
US : U.S.: Nasdaq
$ 6.42
-0.02 -0.31%
Volume: 4.53M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.27 billion
Rev. per Employee
$108,554
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/zigman2/quotes/203734337/delayed
CA : Canada: Toronto
$ 8.21
0.00 0.00%
Volume: 1.40M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.63 billion
Rev. per Employee
$139,269
loading...
/zigman2/quotes/206842762/composite
US : U.S.: Nasdaq
$ 4.53
+0.07 +1.57%
Volume: 3.15M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.65 billion
Rev. per Employee
$70,043
loading...
/zigman2/quotes/209129655/composite
US : U.S.: Nasdaq
$ 10.12
-0.13 -1.27%
Volume: 21.62M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$4.75 billion
Rev. per Employee
$244,326
loading...
/zigman2/quotes/209289540/lastsale
US : U.S.: Nasdaq
$ 2.04
+0.03 +1.49%
Volume: 8.21M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$600.23 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/206508254/composite
US : U.S.: Nasdaq
$ 1.11
-0.01 -0.89%
Volume: 10.35M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$343.50 million
Rev. per Employee
$76,056
loading...
/zigman2/quotes/200008967/delayed
CA : Canada: Toronto
$ 1.42
+0.01 +0.71%
Volume: 3.51M
Nov. 30, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$439.43 million
Rev. per Employee
$96,922
loading...
/zigman2/quotes/204332491/composite
US : U.S.: NYSE Arca
$ 12.06
-0.21 -1.71%
Volume: 1.76M
Nov. 30, 2021 4:00p
loading...
/zigman2/quotes/208856346/delayed
CA : Canada: Toronto
$ 7.01
-0.17 -2.37%
Volume: 133,683
Nov. 30, 2021 3:59p
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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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