It's been a mixed bag for marijuana producers this year. Though they enjoyed a strong start to 2019 due to global marijuana legalization efforts and the burgeoning use of CBD as a wellness product, the initial euphoria—which sent shares of some producers soaring—is now waning.
Investors have begun to judge these companies by their quarterly performance rather than longer-term future prospects. And it's unlikely that marijuana companies will show profitability anytime soon. As well, they spend heavily on marketing as a way of grabbing market share in this still nascent industry.
With this backdrop, it's the revenue number that most analysts will be focusing on to see how successful cannabis companies have been at translating their inventories into hard cash. Two large pot producers, Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY), are scheduled to respectively report their Q1 and Q2 earnings this coming week. Here's what to look for:
Canopy Growth
It’s not an easy time for Canopy Growth, the world’s largest marijuana producer, which is reporting its fiscal 2020 first-quarter earnings on Wednesday, August 13, after the close.
The Smiths Falls, Ontario-based producer, whose stock closed at $32.93 on Friday, has lost more than 30% of its value in the last three months as the company faces growing pressure to cut losses and curb spending. After its previous earnings report in June, the company’s largest shareholder, Constellation Brands (NYSE:STZ) forced the ouster of Canopy’s chairman and co-chief executive officer, Bruce Linton, on differences over strategy and spending decisions.
Constellation, which owns 38% of Canopy and controls its board, wants management to focus more on operational efficiency after a major acquisition spree. Since Constellation’s $4 billion investment was announced in August 2018, Canopy has done $781 million in deals, according to Dealogic. Canopy also signed a deal in April that gave the company the right to buy Acreage Holdings (OTC:ACRGF), a New York City-based investment firm specializing in the cannabis industry, for $3.4 billion, contingent on the U.S. federally legalizing marijuana.
Investors may see a clear shift towards controlling costs and improving other earning metrics when the company reports earnings, but it’s still a long road to achieving profitability for this producer, which controls the largest market share in Canada’s recently legalized recreational pot market. Analysts on average are expecting losses of -$0.22 per share on sales of almost $86 million.
Tilray Inc.
Tilray is scheduled to announce its fiscal 2019, second-quarter earnings after the market close today, Tuesday, August 12. Analysts' consensus forecast expects sales to double, to more than $40 million, when compared to the Q1 period with -$0.26 a share loss.
In June, Tilary told investors that the Nanaimo, British Columbia-based cannabis company won’t generate positive earnings for at least another year as it spends on the U.S. CBD market and other opportunities. The U.S. legalized hemp and hemp-derived CBD in December, opening opportunities for Canadian producers south of the border. That development prompted Tilray to acquire hemp-food manufacturer Manitoba Harvest and to partner with Authentic Brands Group LLC earlier this year.
Tilray stock, which hit a high of $300 in September last year, is one of the biggest boom-and-bust stories in the cannabis sector where valuations of many stocks can’t be justified simply by looking at their sales numbers. When Tilray announces its earnings later today, that will be the key concern.
After a major plunge since September, Tilray is still one of the most expensive stocks in the sector. It closed at $42.57 on Friday, giving it a market cap of close to $5 billion USD. That valuation may come under scrutiny if the company fails to show a major improvement in sales.