Canopy Growth stock (NYSE:CGC) closed down 14% on Thursday having been down by as much as 17% during the trading session following its quarterly earnings report.
The Canadian based cannabis company’s sales, earnings, and revenue disappointed investors yet again. To be fair, revenue was up but it still missed estimates while Canopy’s non-GAAP EBITDA fell over 150%.
Shares were under pressure from the open after gapping down 10% from Wednesday’s close and it only got worse from there. They were already having had a bad week in the days before the release as a slew of lackluster earnings from other cannabis companies seemed to push the pin ever more into the industry’s bubble.
Considering Canopy is considered the blue-chip of marijuana stocks by market capitalization, many will be wondering after earnings like this if they can’t make a success of the opportunity who can? Companies across the industry are under significant pressure despite real progress on the ground.
Canopy Growth Stock Promising Future
The wave of legalization across the US that began in 2016 looks set to continue into 2020. Michigan announced this week that starting in December, those over 21 will be able to purchase marijuana for recreational use. Illinois will be following suit starting Jan 1, 2020.
As the blanket of illegality started to be rolled 4 years ago, the industry exploded with would-be leaders (?) and investors got caught up in the face of huge potential markets to be tapped in. But they have yet to realize their promise and investors are entitled to wonder why these companies aren’t taking off when they look so well-positioned to capitalize on it.
Failing To Live Up To Their Promise
Canopy’s CEO Mark Zekulin cited slower than expected expansion as one of the main headwinds. He told analysts that the addressable market is only about half of what they originally anticipated, a startling declaration. Despite the smaller than expected potential market, the company is still failing to efficiently crack the existing market. Ontario is home to 40% of Canada’s population yet Canopy has only one store per 600,000 people in the state.
Lack of progress with Cannabis 2.0 products is another hurdle. Health Canada are still reviewing their submissions to produce recreational cannabis in chocolate and beverage formats. All these headwinds are eating into sales each quarter while losses build up.
This is being felt across the industry as cannabis companies try to scale and graduate from being extremely valuable on paper to being extremely valuable in practice.
Canopy’s fellow Canadians Cronos Group (NASDAQ: CRON) and Tilray (NASDAQ: TLRY) both reported earnings earlier this week and shares of both were battered on the back of them. The latter is now down 93% from the highs of September 2018 and while the major cannabis ETF MJ is down over 60% since those hazy days.
Is it possible that investors are becoming more wary of risk-on products despite them experiencing sometimes rapid and extreme growth? Canopy’s stock price rallied almost 2,500% in 2 years, peaking in September 2018. Tilray’s stock popped over 1,000% in a single month that summer. As we approach 2020 it feels like investors are starting to hunker down and get more conservative.
We’re seeing a similar trend in a lot of stocks that IPO’d in 2019. Big expectations are set, there’s huge value on paper and then disappointing real-life results lead to heavy selling in the stock. Uber, Lyft, Levi Jeans and SmileDirect Club are all prime examples. Investors’ near-term valuation views have time and time again turned out to be so unrealistic this year as to be laughable.
Technical View, Near Term Action
News broke this week that the company was working with Canadian rapper Drake. Are fresh celebrity partnerships really the way to turn this ship around? Their founder and CEO was fired last July in a sign of fundamentals changes being made but investors will be scratching their heads at this latest initiative. The company is still shaking off rumors of error-strewn spreadsheets being used to track inventories.
Canopy bears all the markings of a company that learned to run before it could walk or even crawl.
In the near term, investors should be cognizant of the fact that though down 65% in the past seven months, Canopy stock has beaten a very orderly retreat and doesn’t really even look oversold yet. RSI is just above 30 and Thursday’s drop only barely started to stretch out the Bollinger Bands.
The stock is trading back where it was two years ago, right before it took off on the big leg up into 2018 so there should be some near term support. It’s still a falling knife however and not worth getting your hand bloody over just yet. All eyes will be on next quarter’s report to see if they’ve finally started to live up to their promise.
Companies Mentioned in This Article
|Cronos Group (CRON)||$6.63||+0.8%||N/A||-82.88||Hold||$18.18|
|Canopy Growth (CGC)||$18.52||-0.4%||N/A||-11.65||Hold||$43.90|