May has been good for Canopy Growth (TSE:WEED). As of May 28, the stock has increased by 22.9%. The shock has outperformed the broader equity market and cannabis ETFs. During the same period, the S&P 500 Index has increased by 4.2%, while the ETFMG Alternative Harvest ETF (NYSE:MJ) has increased by 18.2%. Canopy Growth’s stock price rose due to the announcement of Constellation Brands increasing its stake in the company, the introduction of new Cannabis 2.0 products, and Aurora Cannabis’s (NYSE:ACB) strong third-quarter earnings. Despite the surge, Canopy Growth is still trading at a 54.3% discount from its 52-week high of $59.74. So, should you buy the stock?
Canopy Growth’s growth prospects
While most cannabis companies struggle for cash, Canopy Growth had 2.3 billion Canadian dollars of gross cash at the end of the third quarter. Constellation Brands invested approximately 4 billion Canadian dollars for a 38% stake in the company. Since David Klein became the CEO of Canopy Growth in December 2019, he has focused on optimizing the company’s operations. Earlier this year, the company closed some of the production facilities in Canada to better align its production with the demand. Also, Canopy Growth closed its African operations and moved towards an asset-light model in the LATAM region. These initiatives could cut costs and drive the company towards profitability.
Meanwhile, Canopy Growth expanded its Cannabis 2.0 portfolio earlier this month by introducing new products. Last month, Health Canada issued a medical device license for Volcano Medic 2, which was developed by Storz & Bickel—a subsidiary of Canopy Growth. I think that the approval could boost the company’s medical sales in Canada. The company is also working to expand its footprint in the US through its First & Free brand. All of these initiatives could boost the company’s sales going forward.
Analysts’ Q4 expectations
Canopy Growth will likely report its results for the fourth quarter of fiscal 2020 on Friday before the market opens. For the quarter, the company expects to report revenue of 128.8 million. The amount represents a rise of 37% from the fourth quarter of 2019 and a sequential increase of 4.1%. The company’s sales might rise due to people stocking up on cannabis before the lockdown, the introduction of Cannabis 2.0 products, and the sales of First & Free brand products in the US.
Meanwhile, Canopy Growth’s adjusted EBITDA losses are also expected to improve. For the quarter, analysts expect the company to report an adjusted EBITDA loss of 88.67 Canadian dollars. The company reported a loss of 97.74 Canadian dollars in the fourth quarter of 2019 and a loss of 91.7 million Canadian dollars in the third quarter of fiscal 2020. Investors should note that in the last quarter, the company beat analysts’ revenue and EBITDA expectations.
On May 22, Bank of America reinstated coverage of Canopy Growth with a “buy” rating. The firm gave the company a target price of 30 Canadian dollars. To learn more, read Canopy Growth: BofA Is Bullish before Its Q4 Earnings. Meanwhile, not all of the analysts are bullish on the stock. On Wednesday, Cantech Letter reported that Jason Zandberg of PI Financial maintained his “neutral” rating and a target price of 30.00 Canadian dollars. He expects the company to report 700 million–800 million Canadian dollars on impairments this quarter due to the decision to close some cultivation facilities. He said that the overall cannabis sales in Canada rose 19% in March compared to February. The lockdowns, designating cannabis as an essential item, and the provisions for curbside pickup and home delivery drove cannabis sales.
Overall, 20 analysts cover Canopy Growth. Among the analysts, 45% recommend a “buy” rating, while 55% recommend a “hold” rating. None of the analysts recommend a “sell” rating. As of May 27, analysts’ consensus target price was 29.55 Canadian dollars. The target price represents an upside potential of 8.3%.
YTD stock performance and my take on Canopy Growth
Despite the recent surge, Canopy Growth is trading flat YTD. However, the stock has outperformed its peers and cannabis ETFs this year. Aurora Cannabis, Aphria (NYSE:APHA), and OrganiGram Holdings (NASDAQ:OGI) have fallen by 37.1%, 15.8%, and 27.3% YTD, respectively. MJ has also fallen by 16.8% during the same period. The weakness in the cannabis sectors appears to have dragged Canopy Growth stock down. Meanwhile, the impressive third-quarter performance has limited the company’s stock decline.
I have been bullish on Canopy Growth for some time. With Aurora Cannabis already reporting a strong performance in the comparable quarter, I think that Canopy Growth will follow suit. Given the company’s strong balance sheet and impressive growth prospects, I think that investors should keep accumulating the stock.