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Cannabis Sector Can Celebrate Canopy Growth’s Earnings Rally

Cannabis Sector Can Celebrate Canopy Growth’s Earnings Rally

For the first time in a long time, cannabis stocks have a reason to be happy on Canopy Growth’s latest quarterly earnings report.

On Friday, the world’s largest cannabis company by market cap reported revenue and earnings beats — something rare in today’s cannabis market.

Shares of Canopy Growth Corp. (NYSE: CGC) were up more than 20% Friday morning before settling back down a bit, still providing a win for cannabis stocks during a time where losses have dominated headlines for months.

Since reaching a low of $14.22 in November 2019, Canopy Growth stock has jumped 38%, something a majority of the cannabis market can’t say.

Canopy Growth chart 2-14-20

“We delivered significant gross improvement in the third quarter driven by stronger revenues and higher capacity utilization,” Canopy Growth Chief Financial Officer Mike Lee said in a statement. “Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization.”

He also said further cost-cutting measures are planned.

Friday’s early gains were spread out across the cannabis sector as Aurora Cannabis Inc. (NYSE: ACB) shares moved up nearly 4%. Fellow Canadian cannabis company Cronos Group Inc. (Nasdaq: CRON) jumped 6.8%.

In its quarterly report, Canopy Growth reported a jump in revenue of 62% quarter-over-quarter while its gross revenue moved up 8%. The company also said it took 22% of Canada’s recreational pot market — making it the largest company by market share.

Canopy’s adjusted loss was $48.3 million less than analysts expected.

“Canopy’s new CEO is overseeing an awesome turnaround. The company put an end to three quarters of falling sales. Revenue is now at an all-time high. And costs are coming back down,” Banyan Hill analyst and Marijuana Markets: A POTcast host Anthony Planas said.

The Jump Has Been a Long Time Coming

While Canopy Growth stock has started to climb out of its 2019 hole, other cannabis companies have struggled to mount any kind of rally this year.

Shares of Aurora Cannabis have dropped more than 87% since reaching more than $11 per share in October 2018.

ACB chart 2-14-20

The results from Canopy were a stark contrast from its competitor, Aurora Cannabis. In its Q2 2020 report earlier this week, the company reported losses across the board and forecast continued market headwinds going into the next quarter.

Aurora was also hampered by the exit of CEO Terry Booth, who announced his retirement earlier this week.

“Sales continue to fall and cash is running low. With CEO Terry Booth out, shareholders can only hope for a competent leader to step in,” Planas said.

Additionally, Bloomberg reported Aurora Cannabis has just 2.3 months of cash on hand. It’s the cash on hand, coupled with a lack of big money investment that has created challenges for the cannabis market.

“Although we don’t view the departure of Mr. Booth in isolation to be a concern, after disappointing FQ1 results, increasing industry headwinds and now surprisingly muted expectations for Aurora’s remaining FY20, we have made substantial downward revisions to our model,” Canaccord Genuity analyst Matt Bottomley said.

The question of whether cannabis stocks will rebound from a dismal 2019 remains to be seen.

As company valuations level out, investors and private equity firms could be better positioned to invest. If more states opt to legalize recreational marijuana, that could open the market further for cannabis companies to take advantage of.