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Canopy Growth leaves marijuana investors feeling low

This article was originally published on Fool.com

This week has been a big one for themarijuana industry, as some of the biggest companies in the budding sector have given their latest reports about their financial condition. Many investors have looked toCanopy Growth(NYSE:CGC)as the bellwether in the cannabis space, especially given the huge commitment that beer and spirits giantConstellation Brandshas made to the company.

Coming into Wednesdays fiscal second-quarter financial report, Canopy investors expected that the company would be able tokeep up with its cannabis-producing rivals. Some of Canopys numbers disappointed its shareholders, but the company put itself in position during the past few months to meet its supply commitments as Octobers legalization of recreational cannabis in Canada loomed. That will prove far more important to the long-term success of the company, even if investors cant get past the immediate letdown of seeing financial metrics fall short of their hopes.

Canopys revenue rise falls short

Canopy Growths fiscal second-quarter results were in line with what the company had expected, even if they werent entirely satisfying to others. Revenue of 23.3 million Canadian dollars was higher by 33% from year-ago levels, but that was well below the near-tripling that some of those following the stock were expecting to see on the top line. Canopy reported a loss of CA$330.6 million, working out to CA$1.52 per share, which was far worse than the consensus forecast among investors for CA$0.08 per share in red ink.

Canopys financial performance was a natural result of its overall strategy. The cannabis company made only small test shipments of products into recreational channels during the quarter, ensuring that supply chain logistics would work correctly going into mid-Octobers Canadian launch but avoiding larger pre-sales. That should make the current quarters performance look even more impressive, showing the true growth from the rollout.

Fundamentally, Canopys numbers were mixed. The company reported a 34% rise in active registered patients using medical marijuana, hitting 84,400 for the period. Sales volume of cannabis rose only slightly, with a 9% gain to 2,197 kilogram equivalents. However, Canopy stocked up in advance for theCanadian rollout, harvesting 15,127 kilos of cannabis, up 265% from last years 4,167 kilos during the same quarter.

One really bright spot for Canopy was its ability to maintain good pricing power in a tough industry environment. Even as rivals likeTilrayandCronos Groupdealt with lower average sales prices, Canopy reported a 24% rise in its selling price to CA$9.87 per gram. The reason for the success was that the company made more sales to the German market, where pricing is more favorable, and also did a better job of selling itsSoftgel capsules. More than a third of Canopys revenue during the quarter came from cannabis-derived oils, and their value-added features are beneficial both for customers and for the company.

Co-CEO Bruce Linton kept investors focused clearly on whats happening right now. Our entrance into the retail cannabis market has been a success, Linton said, with our SKU assortment obtaining over 30% listings market share in multi-store physical retail store networks nationwide. He pointed to ample inventory levels and strong market conditions that should put Canopy in position to build and sustain a leadership role in the Canadian recreational cannabis market.

Whats ahead for Canopy?

Canopys role in Canada will be critical, with the company having supply commitments of 70,000 kilos to provinces across the country, excluding Ontario. Supply shortages plagued the market early on, but average shipment volume has doubled during the first part of November compared to the last half of October. Retail locations in its Tweed andnewly acquired Tokyo Smokestore concepts are just the beginning of a big growth campaign to add 20 new stores in the next year. Not all provinces allow proprietary store networks, but those that do are a big opportunity for Canopy to differentiate itself from its rivals.

Efforts to expand production continue to make headway. New facilities are coming on line incrementally, and Softgel production in particular has jumped tenfold since last year. Internationally, Canopy has completed its first U.S. shipment under approval by the U.S. Drug Enforcement Administration, and efforts in Latin America and the Caribbean, Australia, and Europe all point toward an expanded role for the cannabis company as markets develop worldwide.

Canopy wasnt shy about its profligate spending. Sales and marketing costs jumped more than fivefold from year-earlier levels, and overhead costs more than quadrupled. However, Canopy believes that strong brand recognition will be the key driver of market share, and spending now should reward shareholders in the long run.

Canopy investors didnt immediately agree, and the stock dropped more than 9% in pre-market trading following the announcement. Yet despite results that fell short of expectations on their face, the strategy that Canopy Growth is following shows a long-term focus that will put the marijuana company in the best position to capture opportunities far into the future.

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