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Cannabis giant Canopy Growth Corp. (CGC) shares have bounced back in the last 3 months, following a brutal decline that dropped the stock more than 70% in less than 7 months. The recent uptick was spurred by narrowing financial losses in the quarter ending September 30, 2019 even though Canopy hasn’t posted a profit for several quarters. Given the mounting losses, investors will be watching a key metric, free cash flow, when Canopy Growth reports Q3 2020 earnings on February 14. Free cash flow is cash available after outflows to support operations and capital assets. In the upcoming Q3 2020 report, analysts expect the company to narrow its GAAP losses per diluted share as quarterly revenues increase for the first time since Q4 2019 and post an 11% year-over-year increase.
Over the past 12 months, Canopy Growth’s stock has dramatically underperformed the S&P 500, posting a 53% loss compared to the index’s total return of more than 22%.
The company’s fiscal year is unusual, with Q1 2020 starting on April 1, 2019. As a result, the upcoming report will issue results for Q3 2020. In the most recent quarter, Canopy’s stock fell more than 25% in the 4 sessions following its announcement of results, which included plunging revenues for the second consecutive quarter.
All GAAP EPS numbers in this story are diluted and all dollar values below are CAD (Canadian Dollar).
Canopy Growth posted steady increases in revenue in Q3 2018 and Q3 2019, but EPS went in the opposite direction during the same period. EPS swung from a meager profit of CA$0.01 to a loss of CA$0.38. In the most recent Q2 2020, the company reported a GAAP loss per share of CA$1.08, which marked a major improvement over the CA$3.70 loss in Q1 2020. Still, the result added up to a CA$0.72 downside surprise compared to consensus estimates for a CA$0.36 loss. At CA$76.6 million, Q2 revenue was lower than anticipated last quarter as well, missing expectations by nearly 28%.
|Canopy Growth Key Metrics|
|Estimate for fiscal Q3 2020||Actual for Fiscal Q3 2019||Actual for Fiscal Q3 2018|
|Earnings Per Share||-CA$0.58||-CA$0.38||CA$0.01|
|Revenue (in millions)||CA$106.2||CA$83.0||CA$21.7|
|Free Cash Flow (in millions)||-CA$135.9||-CA$298.8||-CA$84.2|
Canopy Growth has been unique among cannabis companies because of a $4 billion investment it received from beverage producer Constellation Brands Inc. (STZ) in August 2018. However, in spite of that influx of capital, Canopy Growth has been plagued by difficulties managing cash flow, a problem shared by many other businesses in the cannabis space. Legal cannabis is a new industry and companies like Canopy Growth are typically saddled with enormous expenses on equipment, facilities and other assets.
For that reason, free cash flow is a useful measure of profitability for companies in this field because it which factors in this type of capital spending. Unfortunately for Canopy Growth, its free cash flow figures have been deteriorating for more than 2 years, contracting in 8 of the last 9 quarters. In addition, the company has seen more than a 3.5-fold decline in free cash flow from -CA$84.2 million in Q3 2018 to -CA$298.0 million in Q3 2019. That number fell to an all-time low in the most recent quarter, when the company reported free cash flow of -CA$429.4 million. The free cash flow figures starkly highlight the challenge Canopy Growth faces in becoming profitable on a sustained basis.
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