When Canopy Growth (NYSE:CGC) reports quarterly earnings in February, lower losses are the best situation investors may hope for. Even if the company posts strong revenue growth, bullishness for the cannabis sector is under siege. And investors who bought the stock a few years ago will still have gains holding Canopy Growth stock.
However, those who bought it at a peak will have to wait at least a few years for their Canopy Growth stock to breakeven.
Overall, like a few other pot stocks, CGC stock is an interesting one to look at as we head deeper into 2020. With that said, let’s dive deeper into Canopy Growth and its outlook for the new year.
Support from Constellation Brands
Constellation Brands (NYSE:STZ) posted a full-year EPS forecast of $9.45 to $9.55, above its prior view, in the third-quarter report. Free cash flow will top $1.5 billion.
I mention Canopy Growth’s part-owner because, importantly, the company is unlikely to buy it out. If it did so, CGC stock shareholders are unlikely to get a premium. Conversely, the company’s end to adding additional funds in Canopy Growth suggests that it is confident in its future. Canopy will not need more financial support to run the business.
Also, Canopy Growth added David Klein, the chief financial officer of Constellation, as its CEO last month. This executive’s accounting background suggests that he will run the company with greater operational discipline. The company will no longer spend its seemingly unlimited cash on massive warehouses, nor will Canopy buy other cannabis firms at exorbitant prices.
Disciplined Leadership
Klein held several senior leadership roles at Constellation in the last 14 years. He has experience in the alcoholic beverage industry, and as CFO, has a strong finance background. He also brings the ability to navigate Canopy under highly regulated market conditions.
In hindsight, Constellation may have lost much of its $4 billion investment in Canopy. But looking ahead, shareholders have reasons to rejoice.
Canopy’s management team will likely get reorganized, and this will align the company from start-up growth to profit growth in a maturing market. Although cannabis sales are limited by store count, Canopy and its competitors are already looking at Cannabis 2.0. This is just a catchphrase to characterize edibles, vapes and other forms of cannabis.
Building products in the 2.0 world will still have operational costs and high risks for Canopy shareholders. However, with the new management team, investors may expect its base business stabilizing first.
Outlook for 2020
In Ontario, the increased rate of store openings in 2020 will give cannabis sales a lift. Ontario represents 40% of Canada’s population, but has only one retail cannabis store per 600,000 people. On its conference call, the company said it will launch Cannabis 2.0 products, “which we believe will further differentiate our offering and bring new customers into the market.”
Furthermore, Canopy also has cannabis-infused beverages in different forms, ranging from spirits, sparkling waters, to ready-to-drink formats.
Valuation on Canopy Growth Stock
The pessimistic investor may forecast losses until fiscal year 2023. According to Simply Wall Street, analysts do not expect profits until FY 2023. So, the company will likely lose money from 2020 to 2022 unless something fundamentally improves.
While investors are hopeful of earnings sooner than that, ongoing losses could put pressure on the stock. Canopy Growth stock held right around the $20 level for a while now, but if negative sentiment returns, bears may send the stock lower.
15 analysts covering Canopy Growth have a $22.63 price target. However, Wall Street coverage on the company is dated, as only one analyst from Cantor Fitzgerald posted a report update. The other hold and buy ratings are 1-3 months old.
Final Word on CGC Stock
Canopy Growth stock investors need not sell the stock even though downside risks are rising. The market is opening up in Ontario, and will help the company generate stronger sales this year. Operating costs will fall, too, leading to smaller losses over the next few years.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
