What's Around The Corner For Canopy Growth? Analyst's Thoughts Post Earnings

Canopy Growth Corporation's CGC stock took a deep plunge on Friday after the company announced a $CA16.3 million ($13.08 million) net loss in the second quarter and a CA$77 million wider loss in EBITDA, versus the same period of last year.

The Canadian cannabis giant pushed out a positive Adjusted EBITDA target due to market share challenges in the Canadian recreational business and a slower-than-expected ramp-up of U.S. distribution for BioSteel, while revealing a 3% year-over-year decline in net revenue to CA$131 million.

Prior to last week's earnings release, Cantor Fitzgerald's analyst Pablo Zuanic lowered the price target on Canopy's stock to CA$18.50 to address reduced estimates and reflect sectoral deratings. The analyst kept a 'Neutral' rating and the same price target on the company's stock post-earnings release.

However, Zuanic additionaly lowered the price target to CA$16.3 from CA$18.5 in hours following the market close, as the stock was down 13% intraday as of 3 pm on Friday.

Canopy stock was trading 9.20% higher on Monday morning, at $12.88 per share.

The Thesis

The analyst said that Canopy's move to delay its break-even EBITDA target and $250 million sales per quarter aspiration, from March 2022 to an undefined date, "should have been expected."

The company still expects revenue acceleration in the second half of fiscal 2022, though more modest than previously anticipated, while "achieving profitability remains a top priority," at least according to David Klein, the company's CEO.

"On the call, management provided the building blocks to get to $250Mn in qtr sales and break-even EBITDA, but it did not give a timeframe," Zuanic noted.

That said, he highlighted Canopy's four strategic priorities:

• Stabilization of domestic recreational share in the short term and expansion of share to 20% over time;
• Expansion of U.S. CBD;
• Ramping up of the distribution of BioSteel in the U.S. market, which could end up being a key driver in the path to CA$250 million in sales, as the analyst previously stated; and
• Delivering on cost savings, which, combined with an improved mix, stable SGA, and operating leverage should help reach positive EBITDA.

"We calculate that only by the March 2023 qtr, the company could be hitting the target of CA$250Mn in sales," Zuanic said, adding that break-even EBITDA is expected in fiscal 2024.

Cultivation Becomes More Challenging

"We are starting to put more emphasis on cultivation," he said, as well as "on the ability of operators to produce in-demand flower at an attractive cost."

With the gross margin a negative 54% for the period versus 19% in the corresponding quarter of last year, there is a substantial difference in Canopy's cannabis gross margins compared to other operators.

Zuanic added that cultivation is the challenge Canopy faces.

"We believe improving the product mix and improving cultivation practices will help drive improvement, but we fear this will not be a quick fix," the analyst explained. "The acquired Supreme know-how notwithstanding, that is not something that can be turned around in just over a couple of qtrs."

Photo: Courtesy of Jason Briscoe on Unsplash