Canopy Growth (CGC) is down 50% over the past year, yet another casualty of the great marijuana stock sell-off of 2019. Thad said, Canopy is still the biggest game in Cannabis Town, with a market capitalization of $8.4 billion, bigger than any other publicly traded cannabis company can boast.
And investment firm CIBC believes Canopy Growth stock still deserves that premium valuation.
On the occasion of Canopy Growth’s fiscal Q1 2020 earnings report, CIBC’s John Zamparo defended his ‘outperform’ rating on the stock while lowering his price target 37.5% to C$50 a share. Canopy, argues Zamparo, deserves its premium valuation of “2x the average [enterprise value-to-sales ratio] of large and medium [marijuana] producers.” Specifically, Zamparo believes the stock should be valued at 12 times the average of what he expects to be Canopy Growth’s fiscal 2021 and fiscal 2022 sales — resulting in the aforementioned C$50 price target. (To watch Zamparo’s track record, click here)
And what will those sales be?
Disregarding Canopy Growth CFO Mike Lee’s disavowal of Canopy’s previously announced goal of reaching a C$1 billion annual sales run rate by the end of this fiscal year, Zamparo starts off on a rather wobbly note by citing the company’s goal of a “~$1B revenue run-rate by Q4/F20” as key to its thesis.
But it’s also important to note that Zamparo isn’t predicting C$1 billion in sales this year — just that the company will be producing marijuana at a rate sufficient to generate C$1 billion annually by the end of the year. In fact, this year the analyst now expects Canopy will max out at about C$575 million in sales. That’s 22% below his previous estimate, and probably in the ballpark, given that Canopy reported sales 18% below consensus expectations in fiscal Q1. But the analyst believes Canopy can still race past the $1 billion mark in 2021, achieving sales of perhaps C$1.15 billion.
That’s the good news.
The bad news is that “Canadian recreational performance has stagnated the past two quarters, as competitors’ cultivation assets have come online.” Canopy Growth is preparing itself to capture market share in derivative cannabis products such as drinks, edibles, and perhaps vapes. However, Canopy is currently shedding its “unsustainable” market share in recreational weed now that “competitors [have] improved their offering.”
Going forward, Zamparo expects Canopy Growth to control no more than perhaps 20% to 25% of the market in Canada.
How profitable will this market be for Canopy Growth? Counseling patience on profits (patience is turning out to be a sine qua non for marijuana investors), Zamparo warns that positive earnings before interest, taxes, depreciation and amortization (EBITDA) probably won’t arrive for Canopy Growth before “late F2021 … in Canada.” Don’t expect positive EBITDA before sometime in fiscal year 2022 — early or late, Zamparo doesn’t say — for the company’s global operations.
Unfortunately for investors, this basically wipes out Zamparo’s previous prediction of positive EBITDA earned in fiscal 2020, and ramping EBITDA in fiscal 2021. As of today, the analyst is forecasting negative full-year EBITDA for both fiscal years. To see Canopy Growth produce positive EBITDA for a full fiscal year, it now seems we’ll need to wait till 2022.
All in all, Canopy has had 10 bullish analysts in its corner over the last three months vs. 6 analysts playing it safe on the sidelines. Importantly, the 12-month average price target of $41.84 showcases 73% in upside potential for the stock. (See CGC’s price targets and analyst ratings on TipRanks)