Legal cannabis producer Canopy Growth (NYSE:CGC, TSE:WEED) reported surprisingly weak results.

Revenue came in at C$108 million, 17% worse than consensus of C$130 million.

Revenue was down 13% from last quarter and made them the first large producer to see declining revenue in the first quarter compared to the Q4 2019.

Recreational cannabis revenue fell 31% which is all the more terrible given that higher margin cannabis 2.0 products were released this quarter and should have driven higher demand and sales.

The EBITDA loss of -C$102 million was 17% higher than consensus of a -C$87 million loss and will not be taken well by the market

Reaching positive EBITDA will be just the first step for Canopy to begin mending its reputation with investors.

The new CEO is restructuring the company and finally making the necessary cost cuts to match costs with profits, however the expensive multiple and dissapointing results means this stock is a terrible bargain compared to cheaper, more profitable and faster-growing US competitors.

Canopy Not Priced for Surprises

Canopy remains the most expensive cannabis stock in Canada.

At 16x forward price to sales, Canopy is still way too expensive given its expected growth and profitability.

Why would anyone own Canopy when they can buy a U.S. cannabis company growing at 100% and already profitable for a huge discount no less.

Given the terrible earnings results, this stock could easily restest $10/sh US.

Canopy 4x-16x More Expensive than Peers

Yes, the company’s international reach and name recognition among cannabis consumers are worth something, but the stock premium more than compensates for any positives results we expect in the coming 12 months.

Stepping back a bit, instead of owning a stock with headwinds still to navigate, you could own fast-growing and profitable tech stocks with better margins instead. This is called “opportunity cost” and is a very real concern in the cannabis industry.

The Opportunity Cost of Owning Potstocks
Even if new management can start generating profits, can they find enough growth in Canada and Europe to outperform tech companies growing at 30%-50 and generating 80% gross margins? We think its highly unlikely.
Analyst revenue estimates assume a doubling of the Canadian market every year, a 5% increase in Canopy’s market share to 30% from 25% and stable industry prices. Betting on all three outcomes at once is truly foolish considering Canopy is struggling to hold onto market share and the current oversupply continues to push down prices.

Canopy Sales Growth Worse Than U.S. Peers

Canopy is the second best performing Canadian stock in the past 12 months due only to the backing of Constellation Brands and Canopy’s relatively large cash balance.

The actual financials have been an unending nightmare for those who own the stock and a Powerball Jackpot for short-sellers.

It’s abundantly clear the stock was previously supported by the market belief Constellation would come in to buy the company if the stock price fell below $20/sh.

We looked into the probability of a buyout in a prior in-depth report and found it was a long shot to say the least.

Canopy is on its own as new management attempts to justify a premium multiple.

Canopy (Purple) Has Underperformed U.S. Pot Stocks


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