Canopy Growth’s (TSX:WEED) Latest 62% Revenue Growth Isn’t Repeatable

Here’s why Canopy Growth’s (TSX:WEED)(NYSE:CGC) latest sequential quarterly sales growth could just be 13%, or even lower if excluding recent acquisitions, but it’s still a great quarter.

| More on:

Canopy Growth (TSX:WEED)(NYSE:CGC) stock soared over 15% on Friday after the cannabis firm released a strong earnings report that revealed a 62% sequential net revenue growth to $124 million for its fiscal Q3 2019 ended in December 2019.

Such high double-digit growth rates, especially on a sequential quarter-over-quarter basis, deserve a huge celebration and should naturally drive the stock price wild if they were not already built into analyst and market expectations.

That said, is Canopy Growth’s 62% sequential quarterly revenue growth as big as it appears?

The biggest revenue drivers

Canadian recreational cannabis sales to the provinces and from other business-to-business arrangements surged by 221% over three months, while direct to consumer retail sales grew by 16%.

The “Other revenue” segment pulled a 41% sequential sales surge too. Medical cannabis and international sales were just marginally higher at 4% at best.

Revenue performed very well, albeit not as well. I will discuss this position below.

Benefits from prior charges

The company made some significant revenue charges during the previous quarter ending September 31, 2019 which management called portfolio restructuring charges.

Significant amounts of cannabis extracts went unsold across the provinces as the recreational marijuana market revealed its strong preference for the traditional, high potency dried flower.

The company had to make a $32.7 million charge on sales for the September quarter as it sought new strategies to move the unsold oils and soft gel volumes at adjusted prices.

Excluding the charges made on prior quarter sales, Q3 2020 total net revenue was only 13.2% higher on a sequential basis!

Double digit same-store retail sales growth

Cannabis retailers are seeing some respectable growth rates across Canada, and Canopy is benefiting from this wave as well after reporting an 11% same-store-sales growth at its Tweed and Tokyo Smoke-branded retail stores during the past quarter. Overall, direct to market pot sales were 16% stronger on a sequential basis.

A seasonal thing?

The company’s “Other revenue” line saw a 41% surge during the December quarter, but this run rate isn’t likely sustainable and a sequential growth analysis may no longer be advisable.

Management revealed that the segment’s strong performance was aided by “strong seasonal performance” from its Germany based vaporiser subsidiary Storz & Bickel (acquired in December 2018) and This Works, its British skin-care and well-being subsidiary which joined the group in May last year.

Marijuana hasn’t been a seasonally affected business historically, but taking such emerging seasonality into consideration, investors may have start comparing year-on-year performance and abandon sequential growth analysis on this firm’s results going forward.

Most noteworthy, another recent acquisition, BioSteel Sports Nutrition, which was added to the fold in October last year, contributed “Other revenue” too. Not all of the reported sales growth was from organic sources, however.

Foolish takeaway

With meaning to take the recent earnings glory away from this mighty weed grower, the strong sequential performance in the top line was aided by other not-so-repeatable factors. I wouldn’t expect the same to happen in the next quarterly results installment.

One sticky issue I still have the world’s biggest pot firm is its persistently low gross margins. Even after a change in accounting policies that moved royalties from production costs down the income statement to selling and marketing expenses, gross margins remain severely subdued, at 34% of revenue for the recently reported quarter.

This points to one thing: the company is failing to reduce its production costs per gram of cannabis. Management ceased reporting on per-gram cash costs a long while ago, and I hope the new leadership will give us a better metric, as the former CEO Bruce Linton once suggested.

Otherwise, there’s some promising progress here, although bloated operating costs mean that the company is still a long way from cash flow positive operations.

More revenue growth is required, or else a restructuring similar to Aurora Cannabis’ could be the best route for the new CEO to take to halt the cash burn rate.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »