Will Canopy’s share price light up post-earnings?

Canopy’s share price [WEED.TO]  got a post-earnings buzz on Tuesday (1 June) after posting a 37% surge in sales in its fourth quarter.  And the Canadian pot grower isn’t the only one riding high right now. The Global X Cannabis ETF has been heating up in the past week, supported by big gains from top holdings including Sundial Growers [SNDL] and Aurora Cannabis [ACB].

However, Canopy wasn’t able to hold onto the gains for long, closing down on the day. Still with the stock still down 6% since January (as of 1 June’s close), analysts reckon there could be more upside left in Canopy. So, what do the earnings mean for the mid-to-long-term future of the stock - especially as the US market continues to open up?

 

Why Canopy’s share price popped post-earnings

Canopy’s net revenue jumped 37.6% year-on-year to come in at C$148.3m ($123.3m) in the fourth quarter, up 37.6% year-on-year. Net losses came in at C$617m for the quarter, an improvement on the C$710m seen in the same time last year. The company pinned C$292m of losses on non-cash fair value changes, and another C$75m on impairment and restructuring charges. Adjusted EBITDA losses were $94m, down $8m year-on-year.

For the full-year, net revenue came in at $546m, up 37% year-on-year. Driving this was pickup in sales in Canada, international expansion and diversification into other cannabis-related products.

  

Promisingly, Canopy said it was on track to have a positive adjusted EBITDA in the second half of financial year 2020, with a strengthened balance sheet.

"We made tremendous progress improving our supply chain and right-sizing our manufacturing footprint, bringing supply and demand into balance," said Mike Lee, CFO. "Our cost savings program is on track to deliver $150-$200 million of savings within the next 18 months, and we remain committed to our path to profitability by the end of Fiscal 2022, while continuing to invest in an organization that is focused on insights, innovation and gaining momentum in the U.S. market."

 

The cannabis investment theme

While Canopy’s share price spiked following the earnings release, the stock closed down, just shy of 4% on Tuesday. For the stock to mount a sustained upward trend, much will depend on what happens in the US this year.

2021 was meant to be the year that the US gave the go-ahead for cannabis legislation at a Federal level. That has yet to happen. Instead, more and more states are passing cannabis legislation, gradually opening up the market.

Cannabis sales in the US surpassed $17.5bn in 2020, up 46% from the $12.1m seen in 2019, according to research from BDSA. In Colorado, cannabis sales reached $2.1bn, up 26% year-on-year, while in Oregon recreational cannabis sales hit $1.1bn, up 39% year-on-year.

  

By 2026, worldwide cannabis sales are expected to hit $55.9bn, with the US accounting for $41.3bn. Getting to that number depends on more states legalising cannabis use - so far 15 have made recreational use legal - and it appears the US public is supporting this - 70% of Americans favour legalising cannabis use.

And it's not just pot sales where Canopy hopes to gain a foothold in the US. The company has partnered with Martha Stewart to sell CBD health and wellness products, along with CBD beverages and a range of vaping products.

Against this background, the cannabis investment theme is up 1.36% over the past month, and 54.7% over the past year. The Global Cannabis ETF has gained 2.21% over the month, while producers Aurora Cannabis has grown 4.4% and Cronos Group 2.91% in the same period.

“We are starting to see strong momentum across all of our key businesses and remain firmly focused on capitalizing on U.S. opportunities in Fiscal 2022” - David Klein, Canopy Growth CEO

 

"We are starting to see strong momentum across all of our key businesses and remain firmly focused on capitalizing on U.S. opportunities in Fiscal 2022," said David Klein, CEO of Canopy Growth in a statement accompanying the earnings results.

Canopy’s share price has a C$37.76 price target from the analysts tracking the stock on Yahoo Finance. In the run up to the earnings, William Kirk at MKM Partners bumped up his rating on Canopy to Buy, pinning a C$45.65 price target on the stock - a 55.6% upside on Tuesday’s closing price. The analyst said that any downside to Canopy’s share price in the quarter should be limited.

For Canopy, narrowing losses should be taken as a good sign, especially with the prospects of swinging into profit this year. Should momentum continue, Canopy and other cannabis stocks could see further gains in the second half of 2021.