Revenues Up but Profits Missed Expectations – Could Be Sign of Things to Come

Canopy Growth third-quarter results may be a sign of things to come in the cannabis industry.Canopy Growth reported that third-quarter sales rose 282 per cent over the past year, though a dig deeper into the numbers could reveal something about the current cannabis industry. Unsurprisingly, the recreational cannabis market was the key driver, accounting for more than 70 per cent of the company’s gross revenue, CNBC reported.

The new outlet described Canopy’s third-quarter results as “one of Wall Street’s first looks into the legal recreational marijuana market in Canada” since cannabis legalization in October 2018.

Canopy CEO Bruce Linton seem to suggest that sentiment as well via press release. “The Canadian recreational cannabis market will be dominated in the long term by businesses delivering excellent products and consumer experiences. Sales from the first wave of products and retail environments launched in the third quarter demonstrate that we are capturing consumers’ attention,” he said.

What the CNBC report does not mention directly is that high revenues combined with high costs supports the view that consolidation is expected in the cannabis industry.

Linton also addressed the controversial cannabis shortage, stating that Canopy would focus on core products. Its softgel capsules, which the company says comes in a “variety of medicinal concentrations, from micro to full doses” accounted for 33 per cent of its revenues.

Canopy continues to introduce new products. Oral cannabis sprays and pre-rolled consumables seems to be keeping the company ahead of its cannabis industry competitors. However, cannabis industry analyst Vivien Azer said that operational costs are a drag on Canopy’s bottom line.

“While industry disclosure around gross margin can vary from company to company, for Canopy, cash cost of goods sold per gram of $5.11 looks to be meaningfully higher than its peers, having climbed 15 per cent sequentially. From a gross revenue perspective, adult use was a much bigger contributor than we had modelled, accounting for 86 per cent of sales,” Azer said.

Canopy Diversifies from Canadian Cannabis Industry to US Hemp Industry

Canopy also plans to take advantage of the United States’ recent decision to legalize hemp. It will invest between $100 million $150 million in a yet-to-be-determined location in southern New York state. CNBC notes that is close to its business partner, Constellation Brands. It will also be well positioned in the US cannabis industry should the United States legalize cannabis in 2019.

Canopy already had a New York state licence to produce and process hemp.

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