Profitability For Canopy Growth Company Goes Up In Smoke

Canopy Growth Company Price Could Collapse Very Soon 

We’ve had very high hopes for the cannabis market and Canopy Growth Corporation NASDAQ: CGC, no pun intended, but those hopes appear to be dashed. While we’ve long ago given up hope the Canadian market would reach the valuation original CEOs were projecting we still thought it was possible for the companies to make money. While it may still be possible for the Cannabis Companies to be profitable, the timeline keeps getting pushed back and that is not something we want to see. To be sure, there are factors influencing the market like COVID-19 and US legalization, but it’s time for these overly-hyped names to start delivering what the markets want. If they don’t, at this rate, the value of Canopy Growth Company shares will soon fall into the single-digit dollars and possibly keep moving lower. 

"In new industries where the potential is immense, progress is rarely a straight line. With a focused strategy, a foundation for growth, and our burgeoning U.S. ecosystem, Canopy is uniquely positioned to win as the industry matures."

Canopy Growth Company Chokes On Oversupply 

Canopy Growth Company didn’t have a bad quarter, exactly, but massive amounts of oversupply are cutting deeply into the martins. Ultimately, the ease of growing cannabis, and large amounts of high-quality cannabis at that, is the problem. While the company was able to sell $95 million in cannabis and products it had to write off $87 million due to oversupply. The company’s revenue is another problem, while revenue held reasonably flat at -3.0.% it is due in large part to aquisitions. Adjusting for acquisitions, cannabis sales declined 13% on weak demand in Canada. On a segment basis, the International market slowed to about 1% growth while the Canadian recreational market contracted by 4%.

“Inventory write-downs in Q2 FY22 amounted to $87 million and primarily relate to excess Canadian cannabis inventory resulting from lower sales relative to forecast as well as declines in expected near-term demand. Gross margin in Q2 FY2022 was further impacted by lower production output and price compression in the Canadian recreational business as well as higher third-party shipping, distribution and warehousing costs across North America.”

Moving down the report, the news only gets worse. The company’s gross margin contracted by 7300 basis points to -54% widening the quarterly loss considerably. The company lost $163 million from operations, offset by unrealized gains on a GAAP basis, or nearly double the previous year. Based on our view of the market, Canopy Growth Company will not soon be profitable. Cannabis is highly commoditized at this point and pricing isn’t going to improve without serious changes at the national level. Even so, if pricing for legal cannabis improved it would only strengthen the already well-established black market. 

The Analysts Are Still On Board With Canopy Growth Company

Believe it or not, but the analysts are still on board with Canopy Growth Company. That may change, there have been no rating changes since the FQ2 release, but for now, the Marketbeat.com consensus price target is more than 100% above the current price action. That’s a big vote of confidence in a company that is so obviously struggling with conditions within its own industry. Shares of Canopy Growth Company are down more than 6.0% in the wake of the report and trading at a new low. This is the lowest the stock has traded since the COVID-Correction in March of 2020. The next target for support is at the $10 level, if it breaks then look out below.