Canopy Growth Corp’s long-term growth strategy is solid, GMP says

Canadian cannabis licensed producer Canopy Growth Corp. (Canopy Growth Corp. Stock Quote, Chart TSX:WEED) maintained its “Buy” rating with GMP Securities analyst Ryan Macdonell on Monday, despite the recent quarterly results which were mixed.

Last Friday, Canopy reported Q4 2019 earnings that featured total net revenue of $94 million, up 13 per cent from the previous quarter and slightly above the consensus expectation of $91 million. But expenses loomed large in the report, with the company showing an adjusted EBITDA loss of $98 million, well below the consensus $63 million.

For Macdonell’s part, he was calling for a top line of $107 million and adjusted EBITDA of negative $61 million. In an update to clients, the analyst noted that Canopy’s adjusted gross margin dipped to 16 per cent for the quarter, although management indicated that this could be the trough and that gross margins of about 40 per cent should be reached by Q4 of fiscal 2020.

Continued investment for the long term seemed to be the analyst’s takeaway from the quarter, where Canopy looks to grow its operations abroad ahead of revenue generation. Macdonell noted that Canopy’s SG&A grew to $126 million for the quarter, well above his forecasted $97 million.

“While expenses are rising rapidly, Canopy’s strategy to establish itself in new markets while they are still pre-revenue could prove effective over the long-term, in our view,” writes Macdonell.

“We are leaving our revenue forecasts mostly unchanged as we continue to expect Canopy will ramp up its sales volumes throughout FY20 while maintaining solid pricing.

The company’s guidance for production of 34 tonnes in Q1FY20 is evidence that the ramp up is occurring and supports our revenue forecasts, in our view,” he says.

The analyst is calling for fiscal 2020 revenue and EBITDA of $750 million and negative $321.6 million, respectively, and fiscal 2021 revenue and EBITDA of $1,255 million and $35.1 million, respectively. His “Buy” rating comes with a lowered target price of $65.00 (previously $72.00), which represents a projected return of 22.0 per cent at the time of publication.

More Cantech Cannabis