Bruce Linton: What Canopy is doing is like Amazon's growth strategy
As investors punished Canopy Growth Corp. on Friday following a disappointing quarter punctuated by surging expenses, Bruce Linton – the company’s founder and co-chief executive officer – says he isn’t fretting too much.
“If investors want us to be profitable globally right now, then I’m working at the wrong company,” Linton said in a phone interview with BNN Bloomberg.
Canopy Growth, the world’s largest cannabis producer by market valuation, posted late Thursday a net loss of $323.4 million in its fiscal fourth quarter, more than five times what analysts expected. The losses were attributed to rising costs associated with building out the company’s facilities needed to grow cannabis and refine it into other products such as infused chocolate bars and beverages.
The losses drove down Canopy’s share price by 7.61 per cent to $53.28 as of the end of Friday's trading day. But Linton, who has been courting large, institutional investors to jump on the Canopy bandwagon, doesn’t believe the sell-off is warranted.
“I'm pretty surprised and disappointed that there's not more institutional [investors] buying because they can see if you sell today, you're basically saying [Canopy's] built all this great stuff but don't want to be around when the earnings per share climb,” he said. “Not sure I understand that logic.”
It is, however, the fifth consecutive quarter that Canopy has posted a net loss which hasn’t been lost on analysts that closely follow the company’s stock. Some noted that Canopy’s current cash burn rate is unsustainable and wonder when exactly the company will become profitable.
“With this top line outlook arguably already in the price, however, investors now need to start to see bottom line progress for the stock to really kick on,” said Jefferies International Ltd. analyst Ryan Tomkins in a research note released on Friday. “Against this backdrop, the profit development will likely cause concern, more so the gross margin, with medium-term [earnings] weakness being previously flagged.”
Earlier in the day, Linton told analysts Canopy would be a profitable company in the first quarter of fiscal 2021. Until then, Canopy plans to keep spending cash on completing its various production facilities, marketing and wooing additional staff with stock options, Linton said.
“I literally have never felt more comfortable with what we're doing, making bets and being more maturely advantageous to our shareholders compared to any other company than we are right now,” he said.
Canopy also reported a sequential quarterly decline in recreational cannabis sales – $68.9 million in gross recreational sales in its fourth quarter, down from $71.6 million in the prior quarter – a rarity given the seemingly high demand for legal pot across Canada. Linton attributed the decline in recreational sales to the stilted rollout of legal pot shops across Canada as well as consumer tastes that focused on high tetrahydrocannabinol levels compared to the wide variety of THC and CBD Canopy made available on the market.
“We would have sold more if we had more bud with high THC ready and containerized to be delivered,” Linton said. “The first three months of legalization were interesting because we had zero inventory. The result was we had to refill the channel very shortly after the first harvest and that made for fairly unsophisticated products compared to what’s coming.”
Linton also stated that the company doesn’t expect to write down any unfinished inventory that may be unusable for consumption following a report by analysts from BMO Capital Markets earlier this week. BMO cannabis analysts Tamy Chen and Peter Sklar highlighted the glut of unsold pot stuck in Canadian licensed cannabis producer vaults – estimated to be more than 150,000 kilograms – may wind up being worthless. Anything left unsold at Canopy’s cultivation facilities is earmarked for extraction that could be used to infuse into edibles or vapes, Linton said.
“We're kind of feeling like we're going to be very busy accumulating them so we can actually launch all the things that are coming out,” he said.
Linton reaffirmed the company’s plans to produce $1 billion in revenue in the next fiscal year, largely driven by higher margin products like vapes and cannabis-infused gummies. CBD products with Martha Stewart’s branding behind it are poised to hit the market next year.
Linton added the company intends to have a wide range of offerings available to access the untapped market of Canadians who are curious about cannabis products but don’t want to smoke it in a traditional format.“We want them to buy it and be part of that dialogue during New Year’s,” Linton said.