Canopy Growth’s (CGC) fiscal fourth-quarter results sparked mostly concern from investors who sent the stock tumbling.
Given Canopy’s title as the world’s largest cannabis stock by market cap, there was much anticipation surrounding the announcement of the company’s Q4 update. To the company’s credit, net revenue for the quarter of CA$94.1 million, which narrowly beat consensus estimate of CA$93.7 million, reflects a 313% year-over-year increase. Furthermore, the company provided encouraging guidance, forecasting an annual run-rate of CA$1 billion by the end of FY20. These figures along with reported cash, cash equivalents, and marketable securities totaling CA$4.5 billion make Canopy look like an inspiring investment opportunity. However, the company suffered an operating loss of nearly CA$175 million, along with declining gross recreation sales, international medical cannabis sales, and adjusted EBITDA — which send a bad signal especially as capacity expansion is a key focus area for the company.
After going through the numbers, Jefferies analyst Owen Bennett discusses the company’s prospects, saying that Canopy is “well set up but losses could weigh near term.” As a result, Bennett reiterates a Hold rating on Canopy stock with a C$77.00 price target, which implies nearly 45% upside from current levels. (To watch Bennett’s track record, click here)
Bennett points out that the stock will only gain momentum if investors see bottom line progress. The analyst adds “Against this backdrop, the profit development will likely cause concern, more so the gross margin, with medium-term EBITDA weakness being previously flagged.” While Bennett acknowledges that lack of profitability is tied to the company’s investment commitments and efforts to spend for long-term growth, he feels that it will provoke concern from investors as profitability is becoming more of an investor focus.
Canopy’s quarterly conference call, in which the co-CEO, Bruce Linton, and the CFO, Mike Lee talked about what the future holds for the company, was also informative for Bennett. His biggest takeaways were Canopy’s commitment to a CA$1 billion revenue run rate by the end of FY20 which will largely be driven by Canada, the US hemp CBD to be launched in Q4, and plans to launch pet products in Q4 with Canopy/Martha Stewart branding. While the analyst is hesitant about the immediate success of the Canopy, he suggests that the spending and roster of investments will likely reap rewards.
While the potential for near-term success is heavily debated, bulls still believe Canopy is well-positioned to be a long-term global leader. TipRanks analysis of 13 analysts shows a Buy consensus, with seven analysts saying Buy vs. three analysts suggesting Hold. Surprisingly, the average price target among these analysts stands at $58, suggesting the stock may rise in the coming months by nearly 45%.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.