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Stock Strategist

Canopy Has Global Potential Amid Foggy U.S. Market

The cannabis company took a hit on Q2 earnings, but consumer demand is expected to increase.

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On Nov. 14,  Canopy (CGC) reported second-quarter results highlighted by product mix challenges due to an unexpected and dramatic hit to revenue and profits. After overproducing oil and softgel for the Canadian recreational market, the company had to accept returns and price reductions that led to a CAD 33 million restructuring charge. Management also scaled back its previous goal of CAD 250 million in net revenue in the fourth quarter of fiscal 2020 because of insufficient points of retail sales in the near term. We always questioned the wisdom of setting a target when provincial governments' slow rollout of stores has held back the industry, so the retraction makes sense to us. We maintain our no-moat rating.

We view the announced restructuring charge as a disconnect between the cannabis forms Canopy produced and those that customers wanted, and not reflective of oversupply of cannabis in general. Kilogram equivalents sold increased 397% year over year to 10,913 kilograms, which the Canadian recreational market and international medical market boosted. Furthermore, the business-to-consumer retail channel saw sequential growth of 24% from the first fiscal-year quarter. As cannabis 2.0 rolls out and more consumer-packaged goods will be available for sale, customer demand is expected to increase for these new cannabis products.

Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.