Can Canopy Growth’s Q3 Earnings Lift the Cannabis Sector?

The cannabis sector is going through a rough phase. Last year, the ETFMG Alternative Harvest ETF (NYSE:MJ) and the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) fell by 31.4% and 39%, respectively. The downward momentum in cannabis ETFs has continued this year. MJ and HMMJ have lost 8.1% and 6.5% of their stock values, respectively. So, amid the weakness in the cannabis sector, Canopy Growth (NYSE:CGC)(TSE:WEED) will report its third-quarter earnings tomorrow before the market opens.

Canopy Growth is one of the prominent players in the cannabis space with a market capitalization of 9.45 billion Canadian dollars as of Wednesday. If the company beats analysts’ expectations, the stock would rise and vice versa. The company’s strong performance could also drive the entire cannabis space. So, all of the cannabis investors will be eagerly waiting for Canopy Growth’s third-quarter earnings.

In the last four quarters, Canopy Growth beat analysts’ revenue estimates three times. During the same period, the company’s EBITDA only beat analysts’ expectations once. The higher operating loss has been a major concern for the cannabis sector. So, many companies want to reduce their expenses, either by reducing their workforce or lowering their investments to attain profitability.

Analysts’ third-quarter expectations for Canopy Growth

For the third quarter, analysts expect Canopy Growth to report revenue of 105.1 million Canadian dollars. The expectation represents 26.6% growth from 83.0 million Canadian dollars in the third quarter of fiscal 2019. The acquisition of C3 and This Works, the introduction of CBD products in 31 US states, and growth in both Canadian and international medical sales could drive the company’s revenue during the quarter.

Also, analysts expect Canopy Growth to report a negative EBITDA of 111.3 million Canadian dollars in the third quarter. The expectation represents a fall from a negative EBITDA of 75.1 million Canadian dollars in the same quarter the previous year. We expect that pricing pressure and investment in the development of Cannabis 2.0 products could increase the company’s operating expenses and lower its EBITDA.

Other important things to watch during earnings

In November 2019, Canopy Growth provided an update on its upcoming Cannabis 2.0 products. The products included cannabis-infused chocolates, vapes, and beverages. During the November press release, the company announced that it would launch infused-chocolates in the next few weeks and vapes in early 2020.

On January 17, Canopy Growth announced that it would delay the launch of infused beverages. I think that cannabis-infused beverages is an important category for the company. So, I would like to hear about the launching date for this product category during Canopy Growth’s third-quarter earnings call.

Stock performance

Like most of the cannabis companies, Canopy Growth’s stock price has been under pressure. YTD, the company has lost 4.7% of its stock value as of Wednesday. During the same period, Aurora Cannabis (NYSE:ACB), Cronos Group, and Aphria have fallen by 31.2%, 10.7%, and 19.9%, respectively.