Don’t be fooled by the Canopy Growth fairy tale, this investor says

The heady days of cannabis’ first go-round are now behind us but the sky’s the limit promises persist with companies like Canopy Growth (Canopy Growth Stock Quote, Charts, News, Analysts, Financials TSX:WEED), whose stock is getting close to multi-year lows. But that sagging share price shouldn’t be a beacon to investors, says portfolio manager Ross Healy, who cautions investors from once again getting caught up in the fairy tale.

“Here is a company which virtually hasn’t made a penny to date, its balance sheet is sloping down as a result because it’s slowly consuming its equity. And every time it takes one of those big runs, I think that that the people who were stuck in from the distant past are so delighted because they can finally dump their positions now,” said Healy of MacNicol & Associates Asset Management, speaking on a BNN Bloomberg segment on Thursday.

“Maybe eventually we’ll see the end of it, but this is a pure speculation,” he said.

Cannabis as a sector has been in a prolonged slump since hitting highs earlier in around February, and that includes Canopy Growth whose share price went from $66 earlier this year to now just above $16, putting it at a loss of 49 per cent year-to-date.

The company, which reports its second quarter fiscal 2022 financials on November 5, has made progress on its topline where revenue for its fiscal first quarter was up 23 per cent year-over-year to $136.2 million. For the fiscal 2021 year that ended on March 31, 2021, Canopy’s revenue was up 37 per cent from fiscal 2020 to $546.6 million. 

Those are big numbers, to be sure, but the kicker comes on the bottom line where Canopy is still struggling to get closer to profitability. For fiscal 2021, adjusted EBITDA was a loss of $340.3 million and free cash flow was a negative $630.2 million, while for the first quarter 2022 adjusted EBITDA was a loss of $63.6 million and free cash flow was negative $186.1 million.

Canopy has maintained, however, that this fiscal year will be when the company gets in the black.

“We’re continuing to drive cost savings and operational efficiencies across the company, and remain broadly on track to our target of $150-$200 million [of cost savings] in fiscal 2022- fiscal 2023,” said CFO Mike Lee in the company’s fiscal first quarter 2022 press release in June. “We look forward to scaling our new operating model in coming months as we push forward our profitability goals in fiscal year 2022.”

Canopy appears to be making the right moves to assert its dominance in the cannabis trade. The company has the number one market share in terms of flower sales in Canada, while developing its position in the hot ticket premium cannabis space, having earlier this year acquired premium company Supreme Cannabis. 

As well, Canopy continues to rev its engines in the huge and still-growing US cannabis and CBD markets. The company announced earlier this month a deal where it has the right to acquire the Colorado-based Wana brand of cannabis edibles, contingent upon legalization of marijuana and THC on the federal level. Canopy already has a similar deal in place with US cannabis company Acreage Holdings.

At the same time, Canopy’s CBD presence in the US is developing, with the company’s Biosteel brand of sports drinks signing deals with the likes of NBA teams the Miami Heat and Los Angeles Lakers.

“As we establish Canopy Growth as the world’s leading cannabis company, acquiring the #1 cannabis edibles brand in North America will serve to strengthen our market position in both Canada and the United States,” said David Klein, CEO of Canopy Growth, in an October 14 press release. 

“The right to acquire Wana secures another major, direct pathway into the U.S. THC market upon federal permissibility, and in Canada we’ll be adding the top-ranked cannabinoid gummies to our industry-leading house of brands. We’re confident in the future growth of the edibles category and the tremendous opportunities with Wana,” he said.

But Healy is not swayed by the Canopy Growth story, nor of the high-growth potential in the cannabis industry itself.

“Do I see that the Canadian cannabis environment is conducive to explosive growth? No, I don’t. I look at it the way that I would kind of look at it as a specimen and say, Gosh, it’s interesting but I don’t want that,” Healy said.

“[Canopy’s stock] will fluctuate madly, but that’s all I can say. It’s a gamble. There’s no fundamental value,” he said. “The book value comes in at about 11 bucks if you want a really good targeted bottom. Perhaps when at least you’re buying at book value you’ve got something to hang your hat on.”