Canopy Growth Corp’s stock is just too expensive right now, Canaccord Genuity says

Canopy Growth Corp’s (TSX:WEED, NYSE:CGC) recent quarterly earnings missed expec-tations for its bottom line, but Neil Maruoka of Canaccord Genuity believes that the higher cost of goods sold and operational expenditures are all part of the ramp-up for the recreational canna-bis market. On Thursday, the analyst reiterated his “Hold” recommendation for Canopy with a raised price target of $32.00.

Canopy’s Q4 fiscal 2018 financials featured a topline of $22.8 million, up from $14.7 million a year ago, but the company also posted a loss of $61.5 million or 31 cents per share for the quarter ended March 31, compared to a loss of $12 million or eight cents a share a year ago.

In a statement, CEO Bruce Linton spoke of his company’s leading position in the global medical cannabis market as well as Canopy’s securing of supply agreements on the domestic front.

“With the largest inventory and capacity today, Canopy Growth is uniquely positioned to go be-yond our current commitments to provincial agencies and cannabis retailers in order to success-fully open the regulated recreational cannabis market in Canada as a producer of choice nation-wide,” Linton said.

Maruoka says that Canopy is clearly positioned as a dominant player in the Canadian cannabis space, with 25,000 kg in supply agreements already in the bag and more on the way.

“Overall, we do not believe that investors should be overly concerned about quarterly results at this stage of the growth cycle, as substantial investment is required to prepare for the introduc-tion of the adult-use market,” says Maruoka in a client update. “With sector valuations at all-time highs, we believe that the weak print provided further impetus for investors to take profits on Canopy as the top 10 Canadian LPs were down ~6.0 per cent on average [on Wednesday].”

The analyst notes that Canopy sold 2,528 kg of cannabis over its Q4, which came in below his estimate of 3,448 kg, at an average price of $8.43 per gram. The company’s total registered pa-tients for medical cannabis grew by seven per cent to 74,000 while revenue from medical patients remained flat for the quarter.

Maruoka made note of Canopy’s international presence, saying that he thinks the company has a good chance of receiving a domestic production license in Germany.

At the same time, the analyst sees WEED to be trading at a high multiple within its peer group.

“While we believe Canopy could emerge as the industry leader once the rec market comes on line, we note that the company currently trades at 30.3x our two-year forward EBITDA forecast, at the high end of larger peers averaging 21.5x EV/EBITDA (2-year fwd),” he said.

The analyst made no changes to his revenue and EBITDA estimates for FY19 and FY20 but did lower his EPS to reflect the higher interest expense related to WEED’s recent $600 million con-vertible debt financing. EPS for FY19 has gone from $0.33 to $0.25, while EPS for FY20 has gone from $0.82 to $0.74.

Maruoka’s target price represents a negative 13.4 per cent 12-month return at the time of publica-tion.