The Canadian cannabis market is heading into a major catalyst with the unleashing of Cannabis 2.0 products in mid-December. Canopy Growth (CGC) remains an expected market leader heading into the launch of products such as edibles and vapes. The problem remains that the large cannabis company sits on the bleeding edge and new technology developments and state of the art facilities come with heavy costs while sales are highly uncertain.
Solid Product Selection
At a media event on November 28, Canopy Growth released a wide selection of vapes, beverages and chocolates. The company isn’t chasing a full set of edibles missing items such as gummies.
Regardless, the company got a big investment from Constellation Brands so a focus on beverages wasn’t surprising. The new 150,000 square foot facility in Smith Falls, Ontario has the capacity to produce 4 million beverages a month.
The selection of beverages is where Canopy Growth probably separates themselves from the industry. The list includes Tweed, Houseplant, Quatreau and Deep Space branded drinks.
The other impressive aspect is the wide selection of drinks with different amounts of THC and CBD, including a range from 2 mg to 10 mg of THC (maximum permitted limit) to a selection of different flavors. The chocolate and vape product lines appear equally impressive.
The hard part here is making money off a diverse selection of products with unknown demand for each version. Canopy Growth is going to dump a lot of product on the market and the risk is ending up with product returns similar to the recreational cannabis market.
The additional issue is the focus on partnerships with award-winning chocolate producers with state-of-the-art facilities rings the bell on products out pricing the strong illegal market. Part of the big benefit of the edibles market is the general product selection not available in the illegal market, yet Canopy Growth doesn’t appear to have selections targeted at pulling this customer base into the products not readily available from a corner dealer.
Analysts forecast quarterly revenues jumping from $80 million in the December quarter to over $100 million in the March quarter and $122 million in the June quarter. This revenue jump encapsulates the Cannabis 2.0 ramp along with a substantial opportunity for additional retail stores in Ontario and all of Canada.
Even with flat operating expenses, Canopy Growth isn’t even set for revenues to top last quarter’s operating expenses. With general targets for 40% gross margins, the FQ1 revenue target of C$162 million would only generate C$65 million in gross profits with all likelihood that the company grows operating expenses from the current base of C$160 million.
The possibility doesn’t appear to exist for Canopy Growth to suddenly run a streamlined operation in the midst of the ramp of a new product category with highly unknown sales outcomes. The market will not be happy with a stock still struggling with EBITDA profits after these two catalysts are unleashed next year.
Wall Street has mixed reviews on Canopy Growth. Of 16 analyst ratings tracked by TipRanks, 6 recommend “buy,” while 10 say “hold.” The average price target is $20.60, which implies a slight downside from current levels. (See Canopy stock analysis on TipRanks)
Weighing in for the bulls, Piper Jaffray analyst Michael Lavery noted, “We continue to estimate a $250-500B potential long-term global cannabis market, with a $15-50B near-term opportunity, and believe Canopy is well positioned in the sector. We expect a slow rollout of retail stores in Canada to continue to hinder recreational cannabis sales growth, but believe Canopy could be well-positioned in the coming year, especially if competitors exit the industry. Canopy is prepared to launch several new brands and product forms when derivative products become legal in December. Canopy’s vapes look technologically advanced and we believe they could be compelling with consumers (pictures inside). Our expectations for the beverage category are modest, but Canopy has innovative products that could help attract new consumers.” Lavery rates the stock an Overweight alongside a $21 price target. (To watch Lavery’s track record, click here)
The key investor takeaway is that Canopy Growth has made several smart moves to position the company for the long-term future in the global cannabis market. Unfortunately, the company still needs make tough decisions on right sizing the business with the lower demand for cannabis products in Canada and around the globe. Canopy Growth likely needs a new CEO to implement the plans needed to make this stock a buy.
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