Canopy Growth Corporation (NYSE:CGC) Pops As Profitability Draws Near

Canopy Growth Company Isn't Aphria

Last week, Aphria (NYSE:APHA) put the fear of God back into the cannabis market when it reported earnings. The company posted a surprise loss despite a double-digit gain in YOY revenue that highlights lingering issues within the industry. Overly aggressive positioning and growth in the earliest days of the business have set the cannabis market up for massive oversupply and contraction. Yes, the sales of recreational cannabis are on the rise in Canada but no, the supply side is not under pressure. If anything, the Canadian cannabis producers will be more than able to keep up with the demand for the foreseeable future.

Canopy Growth Corporation (NYSE:CGC) reported earnings today and put the industry into a little better perspective. The company beat on the top and bottom lines proving not all cannabis companies are the same. Way back in late 2019 when it became evident the cannabis market wasn’t maturing in a way consistent with original projections Canopy Growth Corporation, and others like Aphria, began altering their strategies. The new focus came to include scaling back on growth, divesting dead-weight, stemming cash burn, and hoarding capital. Efforts that for Canopy Growth Corporation are delivering tangible results.

This is the first line of the Canopy Growth Company fiscal 1st quarter earnings report … “Transformation strategy gains traction”

Canopy Growth Corporation Beats On All Metrics

Canopy Growth Corporation, like Aphria, produced some pretty solid results compared to last year and the previous quarter. Unlike Aphria, Canopy Growth Corporation beat on all metrics and shows substantial improvement to operations that put it on track for profitability. Remember, Canadian cannabis companies have yet to show real profits. The best-case scenarios have Canopy Growth Company among the first to do so and possibly as early as the 4th calendar quarter of 2020 or fiscal 3rd quarter 2021.

On the top line, the consolidated net revenue of C$110.42 grew 32% from the prior quarter and 62% from the prior year. That beats consensus by a solid 11% and carried through to the bottom line. At the bottom line, GAAP earnings of C-$0.31 beat consensus by $0.14.

"Following our previously announced restructuring actions, we have substantially reduced our expense and cash burn in this quarter in addition to reducing headcount by over 18% since beginning of this calendar year.  Our marketing and R&D investments are being re-allocated to programs with high-return potential in order to drive sales," says Mike Lee, CFO.

The company’s margins improved by 6% over the quarter due to increased efficiencies within the grow-houses. The good news is that margins grew and beat consensus, the even better news is that margins fell short of management’s projections because of under-utilization. While I suspect under-utilization will be a drag on margins and profitability in the near-term, longer-term the company is well-positioned to realize additional margin improvement as the Canadian and U.S.)  market develops.

"Our gross margins in the quarter came in below our expectations due to under-utilization of our large-scale infrastructure. We've already proven we can deliver 40%-plus gross margin and are confident that we can return to that level as we work toward higher capacity utilization across our facilities as demand for our cannabis products continues to grow” added Mike Lee.

The Technical Outlook: Canopy Growth Is Up Strong After Reporting

Shares of Canopy Growth Corporation have been wallowing near the post-pandemic low for the last few months. The news from Aphria put some additional pressure on them but not too much, support held firmly above the $16. The Q1 report has price action up more than 7.5% in the pre-market, confirming support in the $16 to $18 range and setting the stock up for additional upside. The indicators are lagging (based on Friday’s close) but set to fire bullish crossovers upon today’s open.

There is some risk of profit-taking as share prices reach the $20 but resistance is not expected to be strong. If price action is able to move above $20 we could see it testing $22 and $24 within weeks. Longer-term, share prices are expected to climb as the company approaches profitability. The real catalyst, though, for this and all cannabis companies, will be when U.S. legalization is passed and another $10 to $20 billion dollar marketplace is opened up.