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Is Canopy Growth a ‘Buy’ after Its Recent Pullback?


Jun. 10 2020, Published 9:28 a.m. ET

Since Canopy Growth (NYSE:CGC)(TSE:WEED) reported its results for the fourth quarter of fiscal 2020, it has lost 22.4% of its stock value as of Tuesday. In the fourth quarter, the company’s revenue fell short of analysts’ expectations by 16.2%. The adjusted EBITDA losses were also 15% higher than the expectations. Investors were in for a shock. They expected a strong performance from Canopy Growth especially after Aurora Cannabis (NYSE:ACB) reported an impressive performance for the comparable quarter.

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Canopy Growth’s management blamed the shift in customers’ preferences to value products and the phased roll-out of its Cannabis 2.0 products for the decline in sales. During the quarter, the company’s market share declined from low 20s to high teens. Management also withdrew its earlier announced timeline for reporting a positive EBITDA. Management said that it would implement a strategy reset and organization redesign this fiscal year. The stock fell due to weak fourth-quarter earnings, a decline in market share, and the guidance withdrawal. Should you buy the stock after the recent pullback?  

Analysts’ revenue expectations for Canopy Growth

Analysts expect Canopy Growth to report revenue of 543.6 million Canadian dollars in fiscal 2021. The amount represents a YoY growth of 36.3% from 398.7 million Canadian dollars in fiscal 2020. The company has been focusing on recreational and medical cannabis to drive its sales. During the fourth quarter, the company’s recreational sales declined by 28% due to weakness in flower and pre-roll joint sales. The company’s management stated that it was slow in reacting to changing market dynamics and consumer preferences. So, the company will build its consumer insights and analytics capabilities to address these issues. The company also appointed a new chief insights officer.

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Meanwhile, Canopy Growth has been investing to develop high-quality products at various price points to meet customers’ different needs. In Cannabis 2.0 products, Canopy Growth has already introduced three ready-to-drink cannabis beverages. The company started shipping its fourth beverage, Deep Space, in the last week of May. Canopy Growth has already introduced a portfolio of vape products and cannabis-infused chocolates. In the US market, the company is working with This Works and BioSteel to develop innovative CBD products for the US market. I think that all of these initiatives should drive the company’s revenue this fiscal year.

Analysts’ EBITDA expectations

Analysts expect Canopy Growth’s EBITDA losses to decline this fiscal year. For fiscal 2021, they expect the company to report an EBITDA loss of 268.6 million Canadian dollars. The amount is an improvement from a loss of 442.8 million Canadian dollars in fiscal 2020.

During the earnings call, Canopy Growth’s management announced that it will focus on three core markets—Canada, the US, and Germany. In Africa, the company transferred all of its operations to local partners. In Latin America, the company moved to the asset-light model. Meanwhile, the company lowered its production capacity by 40% in Canada by closing its two greenhouse facilities. The company also cut down on its headcount. All of these efforts will likely bring the company’s expenditure down.

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Analysts’ recommendations

Since Canopy Growth reported its earnings, Canaccord Genuity, CIBC, Benchmark, Eight Capital, Stifel, and Cowen have all lowered their target prices. Meanwhile, Stifel, CIBC, and Cormark have also downgraded the stock. Overall, analysts favor a “hold” rating for Canopy Growth. Among the 21 analysts, 66.7% recommend a “hold,” 19% recommend a “buy,” and 14.3% recommend a “sell.” As of June 9, analysts’ consensus target price was 22.96 Canadian dollars. The target price represents a fall of 3.2% from the current stock price.

YTD stock performance and my take on Canopy Growth

After the recent fall, Canopy Growth’s returns for this year have turned negative. YTD, the company has lost 13.2% of its stock value. The stock has underperformed the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ). HMMJ is trading just 7.8% down YTD. During the same period, Aurora Cannabis (NYSE:ACB) and HEXO (TSE:HEXO) have lost 40.9% and 30.4%, respectively, while Aphria is trading flat.

Despite the recent setback, I think that Canopy Growth will bounce back. Cannabis 2.0 products have been contributing more to the company’s total revenue. In this quarter, until May 29, the Cannabis 2.0 sales contributed 9% to the company’s total revenue compared to 2% in the last quarter. With the strong backing of Constellation Brands, the company could capture significant share in the cannabis-infused beverage category. The company has also been reducing its expenses. By the end of the fourth quarter, Canopy Growth’s gross cash was 2.0 billion Canadian dollars. Considering the company’s growth prospects, management’s initiatives, and the strong balance sheet, I think that Canopy Growth will bounce back. So, investors should utilize this opportunity to accumulate the stock.

Last month, Aurora Cannabis had an impressive third-quarter performance. Read Aurora Cannabis Continues to Shine: Should You Book Profits? to learn more.


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