It’s been a brutal third quarter for cannabis stocks, but Canopy Growth Corp. CGC is well positioned to exceed growth expectations in the third quarter, one Wall Street analyst says.
The Analyst: Cantor Fitzgerald analyst Pablo Zuanic reiterated his Neutral rating for Canopy and raised his price target from $20.56 to $20.93.
The Thesis: Zuanic says Canopy may be dealing with one of the same problems that has impacted Aurora Cannabis Inc, ACB — too much reliance on the flower value segment rather than higher-margin products. As a result, the companies are getting hit by price deflation, even at the low end of the price scale.
Flower made up 69% of Canopy’s recreational sales in the fourth quarter of 2019. That level dipped to 57% in the second quarter of 2020 but then increased back to 61% in the third quarter.
Fortunately, Canopy has much more financial flexibility and can afford to take more risks than Aurora, Zuanic says.
“Despite similarly challenged profit margin economics (adj. EBITDA margins of -95% in the last qtr at WEED, and -48% at ACB), WEED can afford to take more risks, with a larger percentage of revenue coming from outside domestic cannabis (47% vs. 13% at ACB), and a much stronger B/S (net cash of $1.5Bn, vs. net debt of $369Mn or 1.3x sales at ACB),” he added.
Zuanic sees "near-term upside" for Canopy shares given encouraging market data. Cantor is projecting 24% sequential sales growth for Canopy in the third quarter, more than three times the 7% consensus analyst estimate.
Benzinga’s Take: Given all the uncertainty that remains in the cannabis space in the near-term, it may be wise for cannabis bulls to take a diversified approach to investing.
Consider buying a basket of Canadian legal producers like Canopy as well as U.S. multi-state operators that have high-quality balance sheets and leading market shares.
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