We can’t make up this headline.
Martha Stewart, yes that Martha Stewart, joined Canopy Growth Company (CGC) as a strategic advisor.
The headline seemed so odd that search volume for CGC in our TrackstarIQ Data spiked this week.
As we researched Canopy Growth, one of the largest publicly traded cannabis companies, we found a pretty shaky business underneath.
With earnings approaching on June 1st, we wanted to give you a preview of what to expect.
Revenue sources
As you might know, Canada legalized recreational marijuana usage.
Unsurprisingly, Canopy Growth, which is based out of Canada, derives nearly 80% of its revenues from Canada.
In Canada, the majority of their revenues comes from basic marijuana sales while their international sales are mainly composed of oils and softgels.
There’s just one tiny problem – it can’t turn a profit.
Since they went public, CGC experienced enormous revenue growth and even larger losses.
While the company expects 40%-50% compounded annual growth from 2022-2024, they only identified around $200 million in annual savings.
Right now, they’re burning through over $100 million each quarter.
The fact remains they barely turned an operating profit during the last few quarters.
Management claims they will hit positive operating cash flow in FY 2023 and positive free cash flow in FY 2024, but they don’t really explain how.
Canopy also has a history of terrible acquisitions including $600m for Hiku and $500m for two B.C. Tweed greenhouses (both of which were eventually shut down).
Luckily, the company has plenty of cash on its balance sheet to weather a few more years.
Recent catalysts
9 times out of 10, people associate marijuana with cannabis companies.
As noted earlier, one of their biggest international segments is cannabidiol (CBD).
Martha Stewart already had a previous relationship with Canopy Growth.
Launched in the fall of 2020, the product line offers CBD wellness supplements with flavors inspired by some of Martha’s most popular recipes.
More recently, Canopy Growth expanded and signed a distribution deal with Southern Glazer’s Wine and Spirits to distribute their Quatreau CBD drink in seven states.
But the holy grail is full legalization in the U.S., which remains elusive.
Our ‘pot’ take
It seems a bit absurd that the sleazy guy you knew in college could turn a profit and a well-funded business can’t.
Canopy Growth isn’t alone. Most, if not all of the cannabis companies don’t turn a profit.
Yes, the sector has immense growth potential. But across the board, management appears incompetent.
Until that happens, tread carefully.
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