Canopy Growth gets price target cut at PI, maintains “Buy” rating

With its latest quarterly earnings, Canopy Growth (Canopy Growth Stock Quote, Chart TSX:WEED) has shown itself to be the cannabis market leader in revenue but also in expenses, a result which has moved PI Financial analyst Jason Zandberg to drop his 12-month target for the stock.

In a client update last Friday, Zandberg reiterated his “Buy” rating with the lowered target of $80.00 (previously $90.00), representing a projected return on investment of 50.0 per cent at the time of publication.

Canopy reported its fourth quarter fiscal 2019 financials on June 20, coming in with $94.1 million in revenue and a $97.7-million EBITDA loss. Revenue from recreational sales was $68.9 million, including excise tax), a four per cent decline from Q3, while medical sales of $13.4 million were also down from $16.6 million the previous quarter. Top line growth in Q4 came from “other revenue” of $24.2 million which included sales of vaporizer devices, extraction services and clinic partners.

Canopy said it harvested 14,469 kg of cannabis over the quarter, which was up from 7,556 kg during the previous quarter, while management said that Q1 2020 should feature a harvest of over 30,000 kg.

The $94.1 million top line was slightly below Zandberg’s forecast of $98.8 million but the analyst writes that the bigger surprise was the growing losses and significant increase in operating expenses.

“Operating expenses during the quarter were $242.9 million, more than the $226.3 million in net revenue for the entire fiscal 2019,” Zandberg writes. “Part of this total was $93.2 million in share-based expenses but even without this figure operating expenses grew 316 per cent year-over-year.”

The analyst has cut his target due to a reduction in his EBITDA estimates, which went from negative $83.8 million and $378.7 million for fiscal 2020 and 2021, respectively, to negative $236.2 million and $155.4 million, respectively. His sales forecasts have gone from $750.1 million and $1,419.5 million in fiscal 2020 and 2021 to $707.6 million and $1,420.5 million, respectively.

“That said, WEED has $4.5 billion in cash so there is no fear of the Company running out of funds in the near term and the potential for growth in the US (hemp and Acreage) and globally still justifies future upside in our opinion. Our target is 153x our FY21 EV/EBITDA estimate,” says Zandberg.

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