Reports that it could take Canopy Growth Corp (NYSE: CGC) three to four years to turn in a profit is not going well with investors. The stock is the subject of increased pressure on disappointing quarterly results compounding the issue. Amidst the poor run in the market, one cannot dispute the fact that the company is investing heavily as it continues to diversify and expand its footprint in the multi-billion-dollar industry.
Canopy Growth Price Analysis
Canopy Growth is on an investment spree that continues to take a toll on its profit margins. Amidst the investment spree, revenues are growing at an impressive rate even though they did fall short of analyst estimates in the recent quarter. However, a wider than expected net loss has not gone over well with investors, which explains the beating the stock continues to receive in the market.
Since peaking in May at $52 a share, Canopy Growth has come down tumbling. The stock has lost more than 50% in market value, losing a good chunk of the gains accrued since the start of the year. While the stock is currently trading in a steep downtrend, it appears to have hit a critical support level at the $27 mark.
Above the critical support level, Canopy Growth remains well-positioned to make a comeback. The immediate resistance level standing in the way of any bounce back from current lows is the $33 mark. Conversely, continued sell-off below the $27 support level could give short sellers a reason to continue pushing the stock lower and target the $25 level, which is a rock-solid support level from which to buy dips off of.
Q1 Earnings Miss
A massive loss of CA$1.28 billion, in the first quarter, is one of the reasons why Canopy Growth is being hammered in the market. Revenue slipping 4% from the previous quarter to $90.5 million has also not gone well with investors consequently fuelling the sell-off wave.
In defense of the disappointing Q1 earnings, it is clear that the loss stemmed from a onetime event associated with the adjustment of warrants held by the company’s partner Constellation brands. Revenue miss on the other was as a result of Canopy Growth reporting only a fraction of the revenue recorded in the quarter. The company wrote off $8 million in gross revenue in anticipation of product returns.
Canopy Growth is already looking into the future in the wake of the first quarter disappointments. According to the Chief Executive Officer, Mark Zekulin, management remains focused on laying a foundation for dominance in the global cannabis industry.
Going forward, the focus will be on investing in the development of the intellectual property as well as building brands for carrying market share in the industry. The focus will also be on scaling production capability for current and future products.
“Fiscal 2020 is going to be another exciting time for the cannabis industry as we close in on the launch of new product formats. Our recent harvests are proof that our focus on operational excellence is working, and we look forward to showing both our Canadian and U.S. customers what we’ve been working on behind the scenes to prepare for the next wave of products coming later this year,” said CEO Mark Zekulin.
Canopy Growth has also moved to strengthen its research and development efforts on the global scene. The company is in the process of completing the acquisition of Beckley Canopy Therapeutics. With the acquisition, the company should rise the ranks to become the global pioneer in medical cannabinoid research.
In addition, Canopy Growth is increasingly strengthening its cannabis distribution network in pursuit of sales. The company has since inked an exclusive distribution partnership with Greenlane Holdings. The agreement will enhance the distribution of Starz & Bickel Vaporizers in the U.S.as the distributor already has over 11,000 retail locations.
“The extension of our relationship through this exclusive agreement with Canopy Growth will allow us to introduce even more North Americans to this premiere brand and pristine line of vaporizer products,” said Aaron LoCascio, Chairman and Chief Executive Officer of Greenlane.
Canopy Growth fundamentals are still strong amidst the recent price slump. The sell-off has mostly come on the broader stock market turning bearish. Revenue growth is still intact, which affirm the company’s growth metrics. Earning miss on the other hand was as the result of a one-time event.
The company is increasingly expanding and diversifying its footprint in the market, which can only point to a bright future. That said the recent plunge presents an opportunity to buy Canopy Growth at a discount.
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Disclosure: We have no position in CGC and have not been compensated for this article.