Canopy Growth (CGC) (WEED) missed analysts’ estimates this year. Investors and analysts had huge expectations from CGC after Canada allowed cannabis in 2018. Marijuana is in huge demand. Hence, hopes were that the top cannabis players like Canopy Growth and Aurora Cannabis (ACB) will flourish afterward.
However, things happened a little different this year. Analysts revised estimates for CGC and peers. Let’s take a look at analysts’ estimates revision for 2020 and what made them revise the estimates.
Analysts revised revenue estimates for fiscal 2020
After Canada allowed cannabis in October 2018, analysts expected Canopy Growth’s revenue to touch $1 billion Canadian dollars in fiscal 2020. However, Canopy missed its revenue estimates in both the quarters of fiscal 2020. Further, peer Hexo (HEXO) missed its revenue guidance for its Q4 2019. It withdrew its fiscal 2020 outlook.
Also, ACB’s results weren’t up to the mark either. It created a subdued outlook for the entire sector. Thus, analysts were pressed to revise revenue estimates. Let’s take a look at month-on-month revisions by analysts for fiscal 2020.
On October 1, prior to CGC’s release of second-quarter results, analysts estimated $621 million Canadian dollars in revenue for full-year fiscal 2020. The company released its Q2 earnings on November 14. It reported $109.3 million Canadian dollars in revenue for the second quarter. This is slightly above analysts estimate of $108 million Canadian dollars.
After the results, in November, analysts lowered revenue estimates to $419 million Canadian dollars for 2020. Further, as of December 27, analysts lowered the estimate to $417 million Canadian dollars for 2020. It is interesting to note that analysts now expect Canopy Growth to hit $1.2 billion Canadian dollars in revenue by fiscal 2022. So, why such a drastic revision?
What made CGC analysts change revenue estimates?
Note that many factors affected Canada’s cannabis sales in 2019. Even though products were readily available, lack of stores affected sales. Slow and tough regulations led to slower store rollouts in Canada. Demand was high and production was on schedule. However, supply issues made it hard for consumers to get legal weed. Hence, people went to the black market. Thus, Canada saw a rise in black market sales this year.
Furthermore, Canopy Growth discussed in its Q2 press release that the last two quarters proved tedious for them. Many factors, such as fewer retail stores and provinces lowering purchases to tackle the demand-supply situation, affected revenue.
Let’s take a look at analysts’ estimates for peers’ revenue for fiscal 2020:
- Analyst estimate ACB to report $371.6 million Canadian dollars.
- Cronos (CRON) could report $151.9 million Canadian dollars revenue in fiscal 2020.
- Analysts expect HEXO to report $75.4 million Canadian dollars revenue.
- Aphria’s (APHA) revenues could come around $593.4 million Canadian dollars.
Analysts revise more for Canopy Growth’s fiscal 2020
EBITDA (or earnings before interest, tax, depreciation, and amortization) determines a company’s profitability. Canopy reported an EBITDA loss of $155.7 million Canadian dollars in its second quarter. This is much higher than analysts’ estimates. Note that all the below mentioned estimates are for fiscal 2020.
Analysts now expect Canopy Growth to report a higher EBITDA loss of $447 million Canadian dollars. In October, prior to earnings, analysts estimated a lower EBITDA loss of $264 million Canadian dollars. The estimate remains unchanged from November. Additionally, ACB could also report an EBITDA loss of $104.5 million Canadian dollars. Meanwhile, APHA could report a positive EBITDA of $32.5 million Canadian dollars.
Analysts lowered their gross income estimate from $131 million Canadian dollars in November to $118 million Canadian dollars in December. Prior to earnings in October, they expected $252 million Canadian dollars in gross income for the full fiscal year.
Analysts’ thoughts on Canopy Growth stock
The “buy” recommendation for Canopy Growth changed since November. Analysts now recommend CGC as a “hold.” The average target price on the stock is now $21.78. This is down from $23.92 in November.
In November, 11 analysts covered the stock. As of December 27, 12 analysts cover the stock. Out of them, 17% of analysts recommend the stock a “strong buy.” Another 17% recommend it as a “buy.” Note, 58% of the analysts have given it a “hold” rating. Also, only 8% gave a “sell” rating.
The demand for edibles is different from the demand for the flower. Therefore, we cannot say 2019 could repeat again. A survey by CGC has shown consumers are more keen on trying edibles. Besides, the product portfolio for Cannabis 2.0 includes a wide range of edibles, beverages, and concentrates. The company is excited to launch its products. This will happen as soon as the provinces in Canada allow them. However, three of the largest provinces won’t see edibles products until January 2020.
Canopy’s expectations and stock performance
So, Canopy expects a different range of consumers for its edibles and beverage market. It is possible revenues and profitability for CGC and its peers will take a drastic turn in 2020. The company still believes it can hit the $1 billion revenue target after Cannabis 2.0 kicks in.
Constellation Brands (STZ) decided not to raise its investment in Canopy anymore owing to the losses. However, being backed by STZ gives Canopy support to work on its growth and expansion strategies. To drive growth, Canopy is focused on strategic deals.
For its third quarter, analysts estimate revenue of $107.2 million Canopy will release its Q3 fiscal 2020 on February 14. We will know more about the company’s performance and growth strategies for 2020 soon. Check 420 Investor Daily for more on the cannabis sector.