Canopy Growth Sets High Expectations

Marijuana investors have looked forward to this moment for a long time, as major companies in the cannabis sector are finally telling them how one of the most important events in the budding industry's history has affected their businesses. In particular, Canopy Growth (NYSE:CGC) has drawn a lot of attention because of its high-profile moves to build capacity and its major partnership with beer and spirits giant Constellation Brands.

Coming into Thursday's fiscal third-quarter financial report, Canopy investors were optimistic about how the company would perform in Canada's rollout of recreational cannabis. Canopy's numbers were impressive, but even more encouraging was management's discussion about the company's strategic intentions. Shareholders look excited about the news, and there's plenty of potential for further growth in Canopy's future.

Image source: Canopy Growth.

Canopy gets a big lift

Canopy Growth's fiscal third-quarter results gave investors most of what they were looking for. Revenue net of excise taxes came in at 83 million Canadian dollars ($62.5 million), which was up a whopping 282% from the year-ago quarter and well higher than the CA$23.2 million that Canopy brought in just three months ago. Net income soared to CA$74.9 million, and that translated to earnings per share of CA$0.22, which was well above consensus expectations for a loss of CA$0.17 per share.

Many of Canopy's fundamental business numbers showed amazing growth. The company quadrupled its sales volume for the quarter, selling more than 10,100 kilos of cannabis compared to just 2,330 a year ago. At the same time, Canopy was able to boost its pricing for several of its sales categories, with average selling price for its medical marijuana products in Canada picking up 19% to CA$9.77 per gram. Similar success came internationally, with prices climbing 5% to CA$13.28 per gram. As expected, recreational cannabis pricing was more competitive, and selling prices of CA$6.96 per gram were lower than the corresponding medical marijuana products. That brought Canopy's overall per-gram average selling price down 12%, but given the change of sales mix to incorporate recreational products, the company wasn't unhappy with that result.

Cannabis-derived oils remained a key focus area for Canopy. The company reported that 33% of product revenue came from oils, with its landmark Softgel capsule products faring quite well.

Yet one thing that Canopy investors need to understand is that much of the bottom-line performance for the company came from adjustments related to changes in the value of outstanding financial commitments. In particular, because the fair value of senior convertible notes and other financial assets fell during the most recent measuring period, Canopy reported more than CA$220 million in upward adjustments on its income statement. Without those adjustments, Canopy would've seen substantial losses, as expenses during the period rose dramatically. Total operating expenses rose nearly fourfold from year-earlier levels, as big boosts in sales and marketing, research and development, and overhead costs all hit Canopy's bottom line. Stock-based compensation expenses were also much higher.

Co-CEO Bruce Linton has the long haul in mind. "Our successful first full quarter with recreational sales in Canada," Linton said, "reinforces our long-held strategy of making meaningful investments early in order to secure market share." The CEO went on to note that the company is "capturing consumers' attention" with its first wave of products in Canada to meet recreational demand.

Can Canopy keep dominating?

Canopy has much more ambitious future plans. The legalization of hemp will play a key role, and Linton expects that Canopy "will continue to expand by making strategic production investments in regions with federally permissible paths to market for our cannabis and hemp offerings."

Other strategic moves include the following:

new supply agreements with multiple companies to extract greater quantities of cannabis oil adding the Tokyo Smoke retail channel to complement its existing Tweed brand completing the commissioning of key growing facilities that have been under construction exploration of intellectual property opportunities related to innovative growth techniques

Most importantly, Canopy remains in a great position to consider massive investment in its business for the foreseeable future. Thanks to the big investment that Constellation Brands made, Canopy has more than CA$4.1 billion in cash and equivalents available for potential spending. That puts the marijuana company in a great position to take its pick from investment opportunities available in the industry without fear of getting outspent by less well-capitalized rivals.

Canopy investors were happy with the report, sending the stock price up 5% early Friday following the announcement. With so many opportunities for prosperity, it's not surprising that shareholders are more excited than ever about the potential that Canopy Growth has heading into 2019.