Sell your Canopy Growth stock, says PI Financial

A drop in market share coupled with “staggering” losses in recent quarters means shareholders should get out of Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED), says PI Financial analyst Jason Zandberg, who reviewed Canopy’s latest quarterly results in an update to clients last Friday.

Canadian cannabis licensed producer Canopy Growth released its fiscal fourth quarter 2020 numbers on Friday, showing net revenue down 13 per cent from the previous quarter and an EBITDA loss of $102.0 million compared to a loss of $91.7 million last quarter.

Canopy’s share price has been in free fall since the release, while management says it’s been working on a new strategic focus, one which foregoes the aim of being first to market everywhere for a more concentrated expansion in a few key markets.

“True to key priorities that I have outlined for Canopy, we have taken steps to align our capacity with the current market demand and focus our resources against the core markets with the largest and most tangible near-term profit opportunity,” said CEO David Klein in a press release.

The Q4 stats were disappointing, according to Zandberg.

Canopy’s top line of $107.9 million was well below his forecast of $132.9 million while the EBITDA loss of $102.0 million was also a far cry from his forecasted loss of $56.5 million. The company also recorded impairment charges totalling $843 million, which were a bit higher than what the company had pre-announced (in the range of $700 to $800 million).

Zandberg noted the clear contrast between the rising revenues experienced by other LPs during the COVID-19 pandemic and Canopy’s loss in market share. The analyst pointed to Canopy’s decision to close its retail operations in March, having only reopened stores recently, as a big factor.

And even as the company is still well-heeled due to the partnership with Constellation Brands, with a current gross cash balance of $2.0 billion at the end of March, Zandberg said, “Although WEED’s cash position is relatively large compared to its peers, it is staggering to reflect on the $3B of cash used over the last five quarters.”

Zandberg has trimmed his forecasts for WEED and is now calling for fiscal 2021 revenue and EBITDA of $465.1 million and negative $147.5 million, respectively, and for fiscal 2022 revenue and EBITDA of $753.4 million and negative $53.3 million, respectively. “We have reduced our outlook for Canopy Growth. We expect results will get worse before we see growth and we feel that Canopy has missed a surge in overall cannabis demand and instead has seen its market share dip to ten per cent in Canada’s rec market
(from a high of ~20 per cent – 25 per cent). We acknowledge that WEED has started to take a data-driven approach to making product decisions (which we applaud) but we feel that the Company will continue to lose market position while it re-defines its new product direction,” Zandberg said.

The analyst closed his report by saying he sees no near-term catalysts to change the negative sentiment on the stock. Zandberg has moved his rating on WEED from “Neutral” to “Sell” and dropped his target from $30.00 to $20.00, which at press time reflected a projected 12-month return of negative 16.6 per cent.