Canopy Growth is not a great investment right now: PI Financial

Ahead of quarterly results from Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED), PI Financial analyst Jason Zandberg is sticking with his “Neutral” rating and $30.00 target.

The analyst delivered an update to clients on Tuesday, noting that Canopy is picking up market share in the Canadian recreational space.

Smiths Falls, Ontario’s Canopy Growth is set to release its fiscal fourth quarter 2020 results on Friday before the bell, with many investors wondering how the company’s Q4 ended March 31 fared during both the launch of cannabis derivatives like edibles and drinkables (begun this past December) and over the first stretch of the COVID-19 crisis.

Canopy last reported earnings on February 14 where its net revenue hit $123.8 million, up 49 per cent from a year earlier and up 62 per cent from the previous quarter, and an adjusted EBITDA loss of $91.7 million, which down 23 per cent year-over-year but up 41 per cent sequentially.

The company released an update earlier this month on its derivatives roll-out, saying the first wave of its cannabis-infused drinks was shipped in March and April and garnered “strong consumer demand” across the country while another two more beverages will be available soon.

“We are proud to see the early responses to our infused beverages,” said CEO David Klein, in a May 12 press release. “We have said all along that infused beverages were going to be game-changer for our industry and we are excited to introduce this new product category to even more Canadian adult consumers in the coming weeks.”

As far as Canopy’s Q4 goes, Zandberg is expecting revenue up 41 per cent year-over-year to $132.9 million and an EBITDA loss of $56.5 million compared to a loss of $97.7 million a year earlier.

“Our Q4FY20 revenue estimate reflects Canopy’s growing market share in Canada particularly within value segment in the rec market as we observe uptick in demand for value products,” Zandberg said.

“WEED dried flower value brand Tweed was ~20 per cent of its total B2B rec sales in Q3 FY20 and we expect this segment to continue to grow. In addition, the upcoming Q4FY20 results should provide more colour on its 2.0 products performance although the quarter will barely reflect sales of beverages as this category was shipped later in March,” Zandberg wrote.

The analyst said overall Canadian rec retail sales surged in March, up 19 per cent from February, thanks to healthy consumer demand during stay-at-home restrictions, the designation of dispensaries as essential services and the startup of curbside pickup and home delivery in some provinces.

Zandberg noted that Canopy will be announcing about $700 to $800 in impairment charges over the fourth quarter due to the disposal of assets both in Canada and internationally, including the closing of cultivation facilities in BC and Saskatchewan, the ceasing of a cultivation facility in Colombia and of hemp farming operations in New York State.

Looking down the road, Zandberg is calling for total fiscal 2020 revenue and EBITDA of $423.8 million and negative $396.0 million, respectively, and for fiscal 2021 revenue and EBITDA of $780.4 million and negative $31.6 million, respectively. His $30.00 target represented at press time a projected return of 7.7 per cent.