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Can Q2 earnings reignite the Canopy Growth share price?

Canadian cannabis grower Canopy Growth is positioning itself for US expansion with offshoot Canopy USA. This comes despite slow progress on federal legalisation of marijuana, which has sent both Canopys share price and the wider market on a downward spiral. Canopys upcoming second quarter results should provide insight on Canopy USA, along with how the company is performing in its core Canada market.

Canopy Growths [WEED.TO] share price lit up last Tuesday 25 October after it announced it would create a new entity Canopy USA LLC to purchase companies Acreage Holdings, Jetty Extracts and Wana Brands. The deal will allow the Ontario-based Canopy to take control of the companies should cannabis use be approved at a federal level in the US.

By triggering the total ownership of Acreage and bringing Jetty, Wana and Acreage under one umbrella, we get to more aggressively take control of our destiny in the US and get these businesses performing better than they are today,” said Canopy chief executive officer David Klein.

Canopy USA will have its own board, management team and exchangeable shares to create a layer between it and Canopys Canadian business.

Investors will be looking for more detail on the deal in Canopys second quarter earnings due out this week, along with how the company plans to protect market share in Canada.

Whats happening with Canopy Growths share price?

Canopy Growths share price surged on 6 October after President Joe Biden announced that thousands of people with federal offences for simple marijuana possession will be pardoned and the initiation of a review into the drug. Over the past month Canopys stock is up 12.04%, closing Friday 28 October at CA$4.28.

While Bidens announcement and news of Canopy USA have helped the Canopys stock, the share price, like other cannabis stocks, has fizzled this year over the otherwise slow pace of cannabis legalisation at a federal level.

Year-to-date Canopy Growths share price has dropped 61.33%, while the cannabis investment theme is down 62.09%, according to our thematic investment screener. Canopy Growths stock hit a 52-week high of CA$19.98 in intraday trading on 15 November 2021.

What to look out for in Canopy Growths second quarter earnings

In the first quarter earnings covering the three months to 30 June, Canopy Growths net losses came in at CA$2.08m, reversing the C$0.39m profit from the same period the previous year. Net revenue declined 19% to CA$110.3m, down from CA$136.21m.

Net revenue from Canopys recreational cannabis business came in at CA$39m, down 35% year-on-year from CA$60m. Net revenue from medical cannabis fell to CA$52.4m, down 29%  year-on-year from CA$73.5m. In the segment labelled International and Other Revenue, net revenue came in at CA$66.2m, down 29% year-on-year from CA$92.9m

In the first quarter earnings call with analysts, Klein outlined progress against three strategic goals. The first was to stabilise revenue and market share, improve cash margins and to achieve profitability in Canada as soon as possible”. 

The second goal was to grow its consumer packaged goods (CPG) business portfolio. During the quarter, Canopy Growth delivered a record CA$18m in sales for sports hydration drink BioSteel.

The third goal is to strengthen Canopy Growths position in the US THC ecosystem. Klein noted that Canopy Growths business when combined with Acreage Holdings, Wana and Jetty generates over CA$1bn in revenue. The creation of Canopy USA can be viewed as an extension of this strategy and investors should expect some commentary around the new entity during the upcoming earnings call.

On the financial front, Canopy Growths chief financial officer Judy Hong said that the company was trying to improve profitability through shifting to high-margin products in the Canadian recreational market. Hong added that the company had committed to delivering savings of CA$30m to CA$50m over the next 12 to 18 months.

For the second quarter, analysts polled by Yahoo Finance expect Canopy Growth to post a loss of CA$0.26 per share, up from a CA$0.03 loss per share in the same period last year. Revenue is expected to come in at CA$114.21m, down 13.1% from CA$131.37m in the same period last year.

Shareholders will want to see how Canopy Growth addresses growing losses in second quarter results, along with an update on its high-margin strategy in Canada and how it is positioning itself should regulation loosen at a federal level in the United States.

The average price target for Canopy Growth from analysts polled on Yahoo Finance is CA$4.26, representing a slight 0.5% upside on Friday’s close.

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