Canopy Growth: Why PI Financial Suggests a ‘Sell’

Canopy Growth (NYSE:CGC)(TSE:WEED) dragged its stock down after its unimpressive end to fiscal 2020. After Aurora Cannabis’s strong results, analysts had high hopes before Canopy’s fourth-quarter results. The company missed the revenue estimates by a huge margin. The losses were also much higher than expected. Many analysts downgraded the stock and cut the target price after its bleak guidance for the future. PI Financial said that Canopy Growth is a “sell.”

PI Financial’s take on Canopy Growth

Canopy Growth’s revenue was 107.9 million Canadian dollars—lower than the estimate of 128.8 Canadian dollars. However, the revenue grew 14.7% YoY (or year-over-year) and fell sequentially. The adjusted EBITDA losses were 102 million Canadian dollars—higher than the estimate of 88.67 Canadian dollars.

Cantech Letter discussed PI Financial analyst Jason Zandberg’s views on Canopy Growth’s fourth-quarter results. He thought that the results were disappointing. The fourth-quarter revenue was lower than Zandberg’s forecast of 132.9 million Canadian dollars. Meanwhile, the EBITDA losses were higher than his estimate of 56.5 million Canadian dollars. Canopy Growth’s impairment charges were 843 million Canadian dollars. Overall, the company still has a strong balance sheet. However, Zandberg said, “Although WEED’s cash position is relatively large compared to its peers, it is staggering to reflect on the $3B of cash used over the last five quarters.”

He thinks that Canopy Growth missed a chance amid surging cannabis demand. Canopy Growth might take a while to restructure its new products. The company launched its next wave of Cannabis 2.0 products last month. As a result, the analyst cut his forecasts. He expects the following

  • For fiscal 2021, the revenue and EBITDA could be around 465.1 million Canadian dollars and -147.5 million Canadian dollars.
  • For fiscal 2022, the revenue and EBITDA could be around 753.4 million Canadian dollars and -53.3 million Canadian dollars.

The analyst downgraded the stock from “neutral” to “sell” and dropped the target price from $30.0 to $20.0.

How do the revenue estimates look?

After Canopy Growth missed the revenue estimates in the fourth quarter by a huge margin, analysts’ expectations fell for the first quarter of fiscal 2021. Analysts expect the company to report revenue of 105 million Canadian dollars—lower than 107.9 Canadian dollars in the fourth quarter. The revenue would be an increase of 16.1% YoY. Analysts expect the company’s revenue growth over fiscal 2021 to touch half a billion Canadian dollars for the. The amount is lower than analysts’ previous estimates. Last year, analysts hoped that Canopy Growth would be able to reach 1 billion Canadian dollars in sales in fiscal 2020. However, the company didn’t meet the target and probably won’t in fiscal 2021 either.

The revenue could be around 123.9 million Canadian dollars in the second quarter, 143.0 million Canadian dollars in the third quarter, and 158.7 million Canadian dollars in the fourth quarter of fiscal 2021.

Analysts revised their fiscal estimates from May. Let’s take a look at month-over-month revisions. For fiscal 2021, analysts lowered the revenue estimates from 679 million Canadian dollars to 560 million Canadian dollars. The revenue estimates were also lowered to 865 million Canadian dollars from 1.0 billion million Canadian dollars for fiscal 2022.

For fiscal 2021, analysts expect Aurora Cannabis’ (NYSE:ACB) revenue to be 411 million Canadian dollars, while Aphria’s (NYSE:APHA) revenue could be around 691 million Canadian dollars.

Positive profitability could take a while

For the first quarter fiscal 2021, analysts expect EBITDA losses of 95.5 million Canadian dollars—lower than losses of 102 million Canadian dollars in the fourth quarter but higher YoY. Analysts expect the losses to fall during the fiscal year. The losses could be around 80.0 million Canadian dollars in the second quarter, 68.6 million Canadian dollars in the third quarter, and 58.4 million Canadian dollars in the fourth quarter.

Analysts don’t hope that the EBITDA losses reduce anytime soon for Canopy Growth. The company suggested that it’s in a transition phase. For fiscal 2021, analysts expect more EBITDA losses of 284 million Canadian dollars from 220 million Canadian dollars in May. Also, for fiscal 2022, analysts expect more EBITDA losses of 89 million Canadian dollars from 23 million Canadian dollars in May. The company won’t hit positive profitability of 273 million Canadian dollars before fiscal 2023.

Canopy Growth’s stock performance

Many analysts are bearish after Canopy Growth’s unimpressive fourth-quarter performance and lower stock price. The stock has declined by 4.6% since its results on May 29. Overall, Canopy Growth has a “hold” rating with two “strong-buy” ratings and one “buy” rating. Currently, the average target price on the stock is $22.33, which is 35% higher than its closing price. The stock closed 2.6% higher at $16.5 on Wednesday.

Overall, May turned out to be a good month for cannabis stocks due to higher demand. Aurora Cannabis’s third-quarter results were a surprise and drove the sector higher. Most of the cannabis companies reported higher revenues. In May, Canopy Growth, Aurora Cannabis, and Aphria gained 14%, 67%, and 28%. Meanwhile, Hexo (TSE:HEXO), MedMen, and Tilray gained 27.8%, 35%, and 36% in May.

With the protests and the COVID-19 pandemic, it’s hard to say how marijuana sales and the sector performance will turn around. Canopy Growth could still take advantage of rising cannabis demands.

Read Will Marijuana Stocks Continue to Surge in June? to learn more.