Should You Consider Buying Canopy Growth?

As of February 28, Canopy Growth (CGC)(WEED) was trading at 25.17 Canadian dollars. So far, the company has lost 7.8% of its stock value year-to-date. Also, Canopy Growth is trading at a discount of 64.5% from its 52-week high of 70.98 Canadian dollars. The company is trading at a premium of 38.1% from its 52-week low of 18.23 Canadian dollars. There has been a weakness in the broader equity market due to the coronavirus outbreak. The weakness has dragged the stock down. However, Canopy Growth reported an impressive third-quarter performance on February 14, which offset some of the declines.

Despite the recent decline, the company has outperformed its peers and the ETFMG Alternative Harvest ETF (MJ). YTD, Aurora Cannabis (ACB), Cronos Group (CRON), and Aphria have fallen by 35.1%, 21.9%, and 28.3%, respectively. Also, MJ’s stock price has fallen by 18.8% during the same period.

So, is there more downside to Canopy Growth’s stock price? First, we’ll look at analysts’ expectations for the company.

Analysts’ revenue expectations for Canopy Growth

Analysts expect Canopy Growth to report revenues of 424.2 million Canadian dollars and 725.8 million Canadian dollars in fiscal 2020 and fiscal 2021, respectively. The estimates represent a YoY growth of 87.4% in fiscal 2020 and 71.1% in fiscal 2021. We expect the growth in medical sales in Canada and international markets, the introduction of Cannabis 2.0 products in late December 2019, and growth in CBD product sales in the US to drive the company’s sales.

Cannabis 2.0 products

Since December 2019, Canopy Growth has introduced many Cannabis 2.0 products like premium chocolate products, Tokyo Smoke Go, Tokyo Smoke Pause, and Tweed Baker Street. During the third-quarter earnings call, the company announced that it would launch Bean & Bud in late February 2020. Moving to vape products, the company introduced its JUJU Power, a rechargeable battery for 510 cartridges, in January. The company plans to introduce its 510 cartridges and proprietary pod-based Tokyo Smoke Luma in the next few months. Canopy Growth’s management said that its focus on delivering quality and safe products led to a delay in launching these products.

Earlier this year, management also announced that it’s delaying the launch of its cannabis-infused beverages due to a delay in the scaling process. The company has already formulated a range of beverages with infused cannabis using its proprietary intellectual property. Also, management thinks that its beverages could disrupt the cannabis market and attract new customers.

Canopy Growth’s expansion in the US market

In December 2019, Canopy Growth entered the US CBD market with its First & Free brand. The company has introduced its products in all of the 31 states where CBD is legal. In October 2019, the company acquired a majority stake in Biosteel Sports Nutrition, which produces natural sports nutrition products. These initiatives will likely drive the company’s CBD sales in the US.

Analysts’ EBITDA expectations from Canopy Growth

In the latest quarter, Canopy Growth reported an adjusted EBITDA loss of 91.7 million Canadian dollars. During the third-quarter earnings call, Canopy Growth CEO David Eric Klein announced that developing a visible path to profitability and positive cash flow were his key priorities. However, analysts don’t expect the company to achieve a positive EBITDA in fiscal 2020 or fiscal 2021. They expect Canopy Growth to report a negative EBITDA of 428.3 million in fiscal 2020 and 211.5 million in fiscal 2021.

In the third quarter, Canopy Growth’s gross margin was 34%. The company’s management aims to achieve a gross margin of 40% in the near term. The company’s management thinks that higher capacity utilization and various cost reduction initiatives could improve its gross margin. However, management added that the delay in launching beverage and vape products could act as a headwind. We expect the introduction of higher-margin Cannabis 2.0 products and the reduction in the company’s SG&A expenses as a percentage of the total revenue to drive its EBITDA during fiscal 2021.

Analysts’ recommendations

Analysts favor a “hold” rating for the stock. Among the 21 analysts that follow Canopy Growth, 12 recommend a “hold,” eight recommend a “buy,” and one recommends a “sell.” As of February 28, analysts have a consensus target price of 32.27 Canadian dollars, which represents a return potential of 28.2%.

Since Canopy Growth reported its third-quarter earnings, Cowen, Stifel, Canaccord Genuity, and CIBC have raised their target prices. Cowen, Stifel, and CIBC hiked the target price from 30 Canadian dollars to 35 Canadian dollars. Canaccord Genuity increased its target price from 25 Canadian dollars to 28 Canadian dollars. Meanwhile, PI Financial downgraded the stock from “buy” to “neutral” and hiked its target price from 25 Canadian dollars to 30 Canadian dollars.

What to expect from Canopy Growth

I expect Canopy Growth to continue outperforming its peers. With support from Constellation Brands, Canopy Growth could gain significant market share in cannabis-infused beverages. I think that the appointment of David Klein as the company’s CEO in December could increase its focus on profitability. Also, most cannabis companies are struggling with their cash position. Canopy Growth had a gross cash balance was 2.3 billion Canadian dollars at the end of the third quarter. With all of these favorable factors, I’m optimistic about Canopy Growth.