Canopy Growth stock is not worth your investment dollars, says PI Financial

New numbers from Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED) show the cannabis licensed producer making progress but there’s still a long road ahead, according to PI Financial analyst Jason Zandberg, who reviewed Canopy’s just-released quarterly results in an update to clients on Tuesday.

Diversified cannabis company Canopy Growth released its fiscal second quarter 2021 numbers for the three months ended September 30, 2020, on Monday, with the Smiths Falls, Ontario-based company showing record quarterly net revenue of $135 million, up 77 per cent from a year earlier, and an adjusted EBITDA loss of $86 million, up 43 per cent from Q2 2020.

Canopy reported Canadian recreational B2B cannabis sales up two per cent year-over-year and up 21 per cent sequentially, due to the fact that many of the company’s retail locations were closed for part of the first fiscal quarter due to the COVID-19 pandemic. Rec B2C net sales increased by 43 per cent and Canadian medical cannabis sales were up seven per cent year-over-year. Sales at the company’s German medicinal cannabinoid business were down three per cent year-over-year and dried flower sales in Germany declined five per cent.

Management highlighted in the press release that its end-to-end review process found cost savings opportunities in the range of $150 to $200 million across cost of goods sold, general and administrative expenses and inventory. The company ended the quarter with a cash balance of $1.7 billion, down from $2.0 billion by the end of the previous quarter.

“Our renewed strategy of winning consumer mindshare, along with increased agility and execution, has resulted in record net revenue for the second quarter and momentum across key areas of business,” said David Klein, CEO, in a press release. “Canopy Growth is positioned for continued growth as we establish a strong leadership position that is showcased through our vast portfolio of differentiated brands and products – including our industry leading cannabis-infused beverages.”

On the fiscal Q2 numbers, Zandberg had been expecting revenue of $108 million and an EBITDA loss of $63.7 million, compared to the realized $135.3 million and negative $85.7 million, respectively.

“Overall, dried flower sales were up 59 per cent to $63.9 million as WEED’s sale of its value-branded Tweed products sold well during the quarter,” Zandberg wrote.

“Gross margins have fluctuated a great deal in Canopy’s past as FY20 margins were negative (8 per cent) and last quarter gross margins were +6 per cent. While not ideal, Q2’s gross margin of just over 19 per cent is heading in the right direction,” he said.

The analyst noted a surge in Canopy’s non-plant revenue, as sales of vaporizers, sports beverages and skincare products helped to boost the company’s “Other Revenue” category by 34 per cent to $43 million. Zandberg said Canopy’s sports drinks brand under BioSteel signed distribution agreements with leading beverage distribution companies through the company’s major investor Constellation Brands.

Looking ahead, Zandberg is estimating full fiscal 2021 revenue and EBITDA of $523.0 million and negative $285.5 million, respectively, and fiscal 2022 revenue and EBITDA of $532.9 million and $132.2 million, respectively. Zandberg said Canopy’s cash reserves are large at $1.7 billion but noted that number has been almost cut in half over the last 18 months with about $1.4 billion spent.

“We are maintaining our rating to SELL rating (risk: SPECULATIVE) and our 12-month target price of $20.00. We recognize that WEED is beginning to move in the right direction but there is still some heavy lifting required,” Zandberg said.

At press time, the analyst’s $20.00 target represented a projected 12-month return of negative 37 per cent. Canopy’s share price finished 2019 down 25 per cent, while so far in 2020, WEED is up 13.9 per cent and up 63 per cent since the start of October.

Last week, Canopy launched a new line of CBD-infused flavoured sparkling water drinks under the Quatreau name, which the company says comes after strong sales growth in its THC-infused beverages brands Tweed, Houseplant and Deep Space, which debuted earlier this year.

“We created Quatreau as an alternative to sugary, caffeinated beverages or even alcohol. With both CBD-only and ‘balanced’ (CBD + THC) offerings in four natural flavours, Quatreau meets the needs of discerning cannabis consumers,” said Klein in a press release.

Canopy also recently launched a Martha Stewart-branded line of health and wellness CBD products in gummies, oils and soft gels, saying the products have captured media attention and seen strong consumer demand. Next up are Martha Stewart CBD products in brick-and-mortar stores over upcoming months.

Also in the US, Canopy says its vaporizer products under the Storz & Bickel name are seeing strong growth due to distribution gains and reorders from US distributors, with the company predicting production will triple by next summer.