Canopy Growth is still a Buy, says GMP Securities

With delays and only a small number of retail locations now open across the country, the first week and a half of recreational marijuana sales has been a disappointment from a distribution standpoint, says analyst Martin Landry of GMP Securities, who on Monday revised his estimates downward for Canopy Growth Corp (Canopy Growth Stock Quote, Chart: TSX:WEED, NYSE:CGC) while maintaining his “Buy” rating and $50.00 target price.

Along with roll-out issues with the various provinces and territories, Landry sees Canopy’s first steps in the Ontario market as questionable, stating that by making only one strain of dried flower of its flagship Tweed brand available on the Ontario Cannabis Stores’ online storefront, Canopy may have trouble capturing its expected market share.

“We previously expected Canopy to capture a 33 per cent share of the Canadian recreational market,” says Landry in an equity research update to clients. “However given that brand preference is not a major decision factor amongst consumers we surveyed and given that Canopy has fewer [stock keeping units] than expected, we believe that a 33 per cent market share may be difficult to attain and that a 20 per cent share may be more realistic near-term until consumers become more familiar with brands.”

The two issues —lower industry sales due to a slower rollout and lower expected market share for Canopy— have impacted Landry’s forecasts for Canopy for fiscal 2019 but not for 2020. The analyst thinks Canopy will produce revenue and EBITDA in 2019 of $288 million (was $469 million) and negative $52.5 million (was negative $0.5 million), respectively, and revenue and EBITDA in 2020 of $1,081 million and $246.1 million, respectively.

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“With a war chest of more than $5 billion, Canopy’s ability to capture the global cannabis opportunity is unrivalled. This upcoming cash infusion should lead to significant expansion and drastically change WEED’s growth profile, which warrants a valuation premium vs peers in our view,” Landry says.

The analyst says while his return to target is negative, his valuation does not include Canopy’s potential entry into the US cannabis market, which may transpire once the STATES Act (which would allow states to legalize recreational marijuana for adults) passes.

Landry’s $50.00 target represents a projected 12-month return of negative 1.2 per cent at the time of publication.