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  • Industry Spotlight
  • cannabis

Could earnings help Canopy Growth’s share price to grow?

 

Canopy Growth’s [CGC] share price has dragged so far in 2020, closing 26 May at $24.34, down 1.2% year-to-date.

February saw unprecedented highs as Canopy Growth’s share price soared to $56.50 during intraday trading on 10 February, but the following day saw a rapid tumble as the stock lost 28% to close at $40.65.

Despite remaining relatively stable in March, Canopy Growth’s share price has been coming down ever since, falling 24.2% in the two months to 26 May.

However, over the last 12 months, Canopy Growth’s share price rose 21.6% (as of 26 May’s close), with an increase seen between November 2020 and February 2021 — though this has since reversed. Investors will hope that the recreational and medical cannabis supplier’s upcoming earnings report will put them in the green.

 

A period of growth?

Canopy Growth will announce its fourth quarter and fiscal year 2021 results on 1 June. Zacks Equity Research expects Canopy Growth to announce sales of $122.88m and losses of $0.18 per share. If correct, these forecast figures would represent a 52.7% increase in quarterly sales year-over-year, with quarterly losses rising 84.5% in the same period.

Zacks also suggests an approximately 34% increase on fiscal year 2020’s net revenue of CA$399m. This would indicate a slowing of growth since fiscal year 2020, which saw a 76% uplift in net revenue on 2019, and covered the 12 months to March 31, 2020. In other words, Canopy Growth’s full year for 2021 includes most of the impact of the coronavirus pandemic, which had crippled markets a few weeks before the end of fiscal year 2020.

Historical data captures this impact. In Q3 2020, Canopy Growth registered net revenue of CA$123.8m, a 62% increase on the previous quarter’s figures, indicating that the business was growing rapidly.

For the final quarter of fiscal year 2020, however, sales contracted to CA$107.9m, and didn’t recover to above pre-pandemic levels for another six months. The Zacks estimate would imply a 37.9% increase in sales year-over-year, indicating that the company is well on the road to recovery following the March crash, especially given the reduction in losses since Q3 2021.

 

Pot luck for legalisation

The five major ETFs specialising in the Cannabis theme all hold Canopy Growth’s stock. Of the five, the Global X Cannabis ETF [POTX] gives it the heaviest weighting at 7.59% of the fund’s assets (as of 26 May), while the Cannabis ETF [THCX] holds the stock in the lowest relative quantities, at 5.05% (as of 26 May).

The Global X Cannabis ETF has grown 42.2% in the year-to-date, while the Cannabis ETF has grown 35.4% in the same period. Like Canopy Growth’s own stock, prices of both have fallen since 11 February, when a focus on the sector from the same Reddit traders that had previously caused a short squeeze on GameStop [GME] lost momentum, but hopes of legalisation at the federal level in the US continue to buoy the industry.

Chuck Schumer, the US Senate majority leader, called for the drug to be decriminalised across the US by 20 April 2022. Federal criminalisation of the drug means that banks are reluctant to serve cannabis companies, but the SAFE Banking Act — which was passed by the House of Representatives on 19 April for consideration by the Senate — would provide a legal framework for them to engage with the industry in states where cannabis is legal. According to Reuters, 17 states now permit adult use, while 36 have legalised the drug for medicinal purposes.

Optimism surrounding the prospect of federal legalisation has run high ever since US president Joe Biden’s election victory in November 2020. Over the past 12 months, the Global X Cannabis ETF has grown 16.4%, while the Cannabis ETF has grown 57.5%.

Disclaimer Past performance is not a reliable indicator of future results.

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