Canopy Growth Corp downgraded to “Hold” at GMP Securities

Following quarterly results he describes as “mixed”, GMP Securities analyst Martin Landry has lowered his one-year price target on Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart TSX:WEED).

On Friday, Canopy reported its Q3, 2019 results. The company lost $78-million on gross revenue of $97.7-million, a topline that was up 350 per cent over the same period last year.

“Our successful first full quarter with recreational sales in Canada reinforces our long-held strategy of making meaningful investments early in order to secure market share,” CEO Bruce Linton said. “With a strong cash position, we added strategic assets and IP [intellectual property] through acquisitions to accelerate the sophistication of our inputs with ebbu, and our consumer-facing outputs with Storz and Bickel.”

Landry notes that this was the first revenue beat for Canopy in the past four quarters, but points out that low capacity utilization translated into gross margins of 22 per cent, the worst level in three years. The analyst says he has a number of concerns about WEED, including concerns about the availability of inventory, a path to profitability he says seems less than clear in light of SG&A expenses that have exceeded revenue for the past three quarters, and high investor expectations that may be disappointed by delays.

In a research update to clients today, Landry downgraded Canopy from “Buy” to “Hold” and lowered his one-year price target on the stock from $70.00 to $65.00, implying a return of 3.5 per cent at the time of publication.

Landry thinks WEED will post EBITDA of (C) negative $216.6-million on revenue of $239-million in fiscal 2019. He expects those numbers will improve to an EBITDA loss of $51.8-million on a topline of $799-million the following year.

“WEED’s shares are up 72% YTD and up 120% in the last 12 months,” Landry says. “This impressive performance is warranted given the company’s leadership role in the global cannabis industry. However, given the concerns expressed above, we believe that WEED’s shares may need a pause before the next leg-up. We are reducing our near-term forecasts to reflect recent profitability trends. Our target is based on a DCF calculation using: 1) a 7.5% discount rate, 2) a 28% share of the Canadian recreational market, (3) 28% EBITDA margin, and (4) a 3.2% terminal growth.”

Below: Canopy Growth CEO Bruce Linton talks Q3 earnings..