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Does Canopy Growth Look Attractive after Yesterday’s Fall?

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Following weakness in the broader equity market due to the coronavirus outbreak and the slump in oil prices, Canopy Growth (NYSE:CGC)(TSE:WEED) fell 11.8% on Monday. On the same day, Aurora Cannabis (NYSE:ACB), Cronos Group (NASDAQ:CRON), and Aphria (NYSE:APHA) fell by 17.3%, 8.0%, and 8.8%, respectively. The ETFMG Alternative Harvest ETF declined by 10.3%, while the S&P 500 fell by 7.6%.

After Monday’s fall, Canopy Growth has lost 33.9% of its stock value this year. Also, the company hit its 52-week low of 17.46 Canadian dollars yesterday before closing at 18.05 Canadian dollars. Currently, the company trades 74.6% lower than its 52-week high of 70.98 Canadian dollars. So, did yesterday’s fall make the stock an attractive buy? First, let’s look at the valuation multiple.

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Canopy Growth’s valuation multiple

Since most of the cannabis companies haven’t become profitable, I have considered the forward EV-to-sales multiple for my analysis. The decline in Canopy Growth’s stock price has also dragged its valuation multiple down. As of Monday, Canopy Growth was trading at a forward EV-to-sales multiple of 7.16x compared to 11.71x at the beginning of this year. Despite the fall, the company is still trading at a premium compared to its peers. On the same day, Aurora Cannabis, Cronos Group, and Aphria were trading at 5.04x, 3.33x, and 1.61x, respectively.

What can investors expect?

Analysts expect Canopy Growth’s revenues to rise by 87.3% in fiscal 2020 to 423.8 million Canadian dollars. For the next fiscal year, they expect the company’s revenue to grow by 69.2% to 717.3 million Canadian dollars. I expect Cannabis 2.0 products and growth in CBD product sales in the US to drive the company’s sales.

Analysts don’t expect Canopy Growth to report positive EBITDA in fiscal 2020 or fiscal 2021. They expect the company’s EBITDA to be -429.3 million Canadian dollars in fiscal 2020 and -213.9 million Canadian dollars in fiscal 2021.

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Analysts’ recommendations

Wall Street favors a “hold” rating for Canopy Growth. Among the 21 analysts, 11 recommend a “hold,” nine recommend a “buy,” and one recommends a “sell.” As of Monday, analysts’ consensus target price is 32.27 Canadian dollars. The target price represents a 12-month return potential of 78.8%.

Last week, LB Securities upgraded the stock from a “hold” to a “buy” rating. Meanwhile, Cowen and Company, Stifel, Canaccord Genuity, and CIBC have all raised their target prices since Canopy Growth reported its third-quarter earnings.

My take on Canopy Growth

Earlier this year, Canopy Growth’s management announced that it would delay the launch of its marijuana-infused beverages due to an issue with the scaling process. After the beverages are introduced, I expect the company to acquire a significant market share in the segment with support from Constellation Brands. Currently, most cannabis companies struggle for cash. Canopy Growth’s gross cash balance was 2.3 billion Canadian dollars at the end of the third quarter. All of these factors make the stock an attractive buy. However, the coronavirus outbreak could put pressure on the stock in the near term.

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