This Analyst Expects Stabilization Across Canadian Cannabis Market, Revises Sales Estimates For Cannabis LPs

Zinger Key Points
  • Tilray, HEXO and Canopy have all reported a year-over-year decrease in retail sales of 39%, 14% and 35%, respectively.
  • Vivien Azer cut revenue estimates for Canopy by 14% while raising the revenue expectations for Cronos.

The Canadian cannabis industry has become a competitive field over the past few years, which doesn’t come as a surprise considering its exponential growth over the same period.

To capture the market share, cannabis companies have been slashing the prices of their products, which had a negative impact on some of the large players within the space, such as Canopy Growth Corp. CGC and Aurora Cannabis Inc. ACB. Year-to-date stocks of both Canadian cannabis giants plunged by 67% and 71%.

In her latest report, Cowen & Co. analyst Vivien Azer revised the sales forecast for several of Canada’s largest cannabis producers, due to a decelerating trend of sales growth seen in the second quarter.

The 21% growth in industry sales over the period has dropped two percentage points year-over-year, representing an improvement compared to the prior quarters, which could mean the market’s potential stabilization.

“While this marks a 2 pt deceleration from 1Q, we note that this deceleration is an improvement from the 4 pt and 13 pt decelerations in 1Q22 and 4Q21, respectively, as category growth stabilizes,” Azer said.

To address the broader industry trends, Azer lowered her price target on Canopy’s stock to CA$3.40 ($2.64) per share from $6.50 as well as on Cronos Group Inc.'s CRON stock to CA$4.30 per share from CA$4.50.

The analyst also cut her revenue estimates for Canopy by 14% to CA$465 million, while raising the revenue expectations for Cronos by 2 % to CA$113 million.

Azer raised her price target on Aurora to CA$2 per share from CA$1.85, attributing it to the company’s potential benefit from higher margins from its medical cannabis business.

Meanwhile, cannabis giants Tilray Brands Inc. TLRY, HEXO Corp. HEXO and Canopy Growth have all reported a year-over-year decrease in retail sales of 39%, 14% and 35% respectively, as compared to Organigram Holdings Inc. OGI OGI.

Canadian Cannabis Producers Dependent On Value Flower

Cantor Fitzgerald analyst Pablo Zuanic pointed out the same in his recent note, adding that Canadian cannabis producers have become dependent on value flower.

Moreover, all big producers including Canopy Growth, Aurora as well as Tilray and OrganiGram reported that value flower accounted for a substantial part of their total recreational cannabis sales, which according to the analyst, doesn’t have to be a bad thing, as long as “companies have the right cost structure."

However, it seems that the five top Canadian LPs in the market share have opted for cost-cutting and are losing market share, except for Organigram, Zuanic pointed out.

The companies that continue to lose share “have prices below the market average and in most cases have also cut prices the most,” he added.

CGC Price Action

Canop Growth's shares traded 3.61% higer at $3.17 per share during the pre-market session on Thursday morning.

ACB Price Action

Aurora's shares traded 0.61% higher at $1.66 per share during the pre-market session on Thursday morning.

CRON Price Action

Cronos' shares traded 0.60% higher at $3.33 per share during the pre-market session on Thursday morning.

Photo: Courtesy of Jason Briscoe on Unsplash

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Posted In: CannabisNewsPenny StocksSmall CapMarketsAnalyst Ratingscanadian LPsCantor FitzgeraldCowenmarijuana salesPablo ZuanicstockVivan Azer
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