Long-time investors who bet on the growth of cannabis in the last few years would have done well to sell into the early-February rally. Canopy Growth (NASDAQ:CGC) briefly traded as high as $56.50. Anyone who guessed that the jump in CGC stock would prove short-lived came out ahead.
Those who bought the stock on the hype are now stuck holding the bag. It may take a long time before Canopy Growth attracts buyers. Speculators may not get fooled a second time.
CGC stock rose when Tilray (NASDAQ:TLRY) shares more than tripled from $20. Tilray peaked at $67.00. It lost more than $30 by the next day, closing at $29.21 on Friday, Feb. 19. It sits around $26 today.
The company’s third-quarter earnings spent more than one-third of its presentation touting its new products. For example, on slide 9, the company cited Martha Stewart’s health and wellness CBD products enjoying strong demand.
The company claimed this brand outsold “over 94% of all CBD brands in the US in just months since launch.” If that were true, then Multi-State Operators (MSOs) in the region will need to worry.
A Closer Look at CGC Stock
At a $14.6 billion market capitalization, Canopy easily dwarfs firms like Planet 13 Holdings (OTCMKTS:PLNHF). Trulieve Cannabis (OTCMKTS:TCNNF) trades at a $5.8 billion market cap. The latter is a more concentrated firm that has posted profits since 2017. It is a top-performing MSO that operates in just six states and has 75 dispensaries.
Canopy set ambitious financial targets. It wants to grow its net revenue by 40% – 50% between FY 2022 to FY 2024. Its positive adjusted EBITDA will not come until the second half of FY 2022, and its adjusted EBITDA margin will top only 20% for the full year 2024.
Canopy is not expecting positive operating cash flow until next year (full-year 2023). To get there, the struggling firm must first cut the cost of goods sold (“COGS”). It targets a COGS savings of $100 – 120 million Canadian dollars in the next 12 to 18 months. Much of its savings will come from network optimization.
The company is still shrinking its ambitious capital allocation objectives, so getting to a positive free cash flow by FY 2024 will require lower capital expenditure. For this year and next, it will spend on an SAP software implementation and investing in various facilities. Capex will remain below CAD 200 million.
Canopy has healthy levels of cash on hand. It ended Q3/2021 with CAD 1.6 billion in cash.
Negative Q3 Adjusted EBITDA
Per Slide 20, Canopy posted 23% revenue growth to CAD 152.5 million. Yet FCF is still negative and adjusted EBITDA was negative. Gross margins are still slipping. In the period, the adjusted gross margin fell from 31% last year to 26%. The company blamed the absorption of fixed costs dragging gross margins.
Sales, General, and Administrative expenses fell by 15% from last year. SG&A and research and development costs fell. Readers who think Canopy is a growth holding should avoid this stock now. If the company’s business enjoyed healthy demand, it would not need to cut development costs.
The share-based compensation decline and lower marketing spend to increase the risks of market share loss. Several cannabis firms in Canada are vying for a bigger market. In the U.S., MSOs face no competition. Furthermore, Trulieve is an example of a profitable firm that will not hold back its store openings or development efforts.
Canopy must find a way to leverage Constellation Brands (NYSE:STZ) from here. STZ owns 18% of Canopy Growth.
Limited Opportunity
Most analysts rate Canopy stock as a “hold.” According to data from Tipranks, the average price target is $37.30.
SimplyWall.st is bullish. The site calculated a $65 fair value. This is based on its future cash flow.
The seasonality chart suggests that the uptrend is over. The stock is entering a period of under-performance.
Sell the stock now and wait until August. By then, if the pattern repeats, Canopy stock will offer upside then.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
