Shares of Canadian marijuana producer Canopy Growth (NASDAQ:CGC) are down more than 50% since their Reddit-induced rally earlier in the year. Moreover, investors bid up CGC stock to build its cash balance in light of various mergers and acquisitions in the industry.
However, most of them were left with a sour taste in their mouths after the company’s forgettable fourth-quarter results. Investors are tired of the company losing money, its massive debt balance and its unreasonable valuation.
CGC stock is one of the priciest marijuana stocks in the sector, with a market capitalization of over $9.5 billion. Despite the drop in price since February, the stock is overvalued across all price metrics by a fair margin. For instance, it’s trading at a massive 14x forward sales. Additionally, its enterprise value is more than 13x forward sales.
The company doesn’t even boast a robust balance sheet anymore either, having raised 930 million CAD in a term loan from King Street Capital Management. Moreover, its net cash position is tumbled to 700 million CAD, having burned 630 million CAD for the year. Hence, such elements significantly limit its bull case at this time.
Another Disappointing Quarter
Though Canopy Growth has improved its sales in the past few quarters, its profitability picture hasn’t improved a bit. It reported a colossal adjusted EBITDA loss of 94 million CAD. Though its revenues improved by 38% on a year-over-year basis to 148 million CAD, they dropped sequentially from 153 million CAD in the previous quarter.
The main issue for the company is that the growth in its business requires additional spending. It spent a healthy 149 million CAD on operational expenses before considering the 19 million CAD in share-based compensation. Gross margins haven’t improved much, despite several companies delivering margins in excess of 35%. A lot of it is due to lower production outputs, inventory write-offs and other related aspects. In the fourth quarter, its gross margins were at just 14%, which pale in comparison to its peers.
The company has plans to cut operating expenses by at least 150 million CAD to 200 million CAD. However, once it cuts its expenses, it would have to worry about its sales run rate. Perhaps the only saving grace in the quarter was the reduction in its inventory balance. Its inventory balance was down to 368 million CAD from 391 million CAD in the same quarter last year.
Exciting Merger and Acquisitions Activity
Canopy Growth will be completing its acquisition of Supreme Cannabis later in the month, creating the third-largest cannabis company in Canada. The combined company will have a 14% market share in terms of sales volume. Supreme Cannabis increased its sales by almost 40%, to 13.6 million CAD on a year-over-year basis. Moreover, it posted its third consecutive quarter of positive EBITDA. Both companies expect to realize at least 30 million CAD in synergies within the next two years.
Moreover, Canopy has signed a distribution partnership with U.S. alcohol company Southern Glazer’s Wine & Spirits. It had already made its way into the U.S. CBD market, and the new partnership will expand it. However, it won’t be able to make a move into the U.S. THC industry with its Acreage deal until marijuana becomes legal at the federal level.
Final Word On CGC Stock
The key investor takeaway from Canopy Growth is that its bear case is more compelling at this time. However, it needs to have a real restructuring plan to align its spending levels with its gross profits effectively.
Moreover, it needs to fortify its balance sheet positioning through more efficient working capital and debt management. Additionally, it is remarkably pricey for its current and future outlook, which is why it’s best to avoid CGC stock.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
