Canopy growth: Still not low (NASDAQ: CGC)

Klimenko Oksana/iStock via Getty Images

After two years of warning investors about this canopy growth (Nasdaq: CGCWeak business model, stock continues to hit new lows. The former cannabis leader is being left behind by the American companies multiplying and triple the revenue base of the Canadian cannabis leader. Mine investment thesis The stock is still bearish, even after dropping below $5.

Destroy the request

Canopy Growth reported FQ4’22 revenue that fell 24.7% from a year ago. The company recorded just C$111.8 million in quarterly revenue, or the equivalent of $87.7 million. Only the Canadian cannabis company operates at an annual operating rate of $350 million, making the business the equivalent of a multi-state medium-sized operator (MSO) in the United States.

Part of the risk with Canopy Growth was the extensive network that the company tried to weed out in the cannabis market while having no real dominant position or home base. The company tried to be all things to all cannabis consumers without any access to the world’s largest THC market leading to business failure.

Channel FQ4’22 results highlight this lack of focus. Canopy Growth saw Canadian recreational cannabis market revenue fall 36% to just C$38.9 million. Even Canadian medical cannabis sales are down slightly while international cannabis sales are down 47% with C3 businesses plummeting at divestment as of January 31. The company appears unable to reconcile extensive operations with a base in Canada and operations in Europe and the United States with no profit in any region.

revenue channel table

Canopy Growth FQ4’22 أرباح Earnings Released

For some perspective, Therasand (OTCQX:TRSSF) Just predicted New Jersey’s single recreational cannabis store would generate $40 million in annual sales with an opportunity to grow sales of up to $70 million. Per COO Ziad Ghanem in the Q1 22 earnings call:

…there was a huge order in excess of 40 million dollars. And we were originally thinking maybe 50 to 60 million dollars per store. And what we’ve seen — or what we’ve seen over the past few weeks is that we really believe that all of our dispensaries, including the smaller Philly store, have the ability to drive like More than 70 million dollars in sales.

This one-store sales level is C$89 million and approaches the total quarterly revenue of a company like Canopy Growth with a huge operating base and thousands of employees. Sales numbers are so weak that Canopy Growth plans to further restructure with the stated goal of reducing cost of goods sold by C$30 million to C$50 million and an additional SG&A reduction from C$70 million to C$100 million. The overall cost reduction target is C$100 to C$150 million.

Canopy Growth reported another unexplainable EBITDA loss of C$121.8 million resulting in an annual loss of C$415.4 million. Even on an adjusted basis, the company continues to lose approximately one Canadian dollar for every dollar spent.

As discussed in earlier research in 2020 on another major restructuring plan, Canopy Growth faced a tough hill to climb with the need to cut costs while achieving stable returns to scale. The company hasn’t learned how to generate revenue without spending huge amounts of money on marketing and additional inventory.

Canopy revenue and average diluted stock outstanding
Data by YCharts

The massive gains in stocks are all the more surprising considering Canopy Growth has burned all the cash from Constellation brands (STZ) Investment. The company has $1.4 billion in cash after burning $0.9 billion in the last fiscal year. With a total debt of $1.5 billion, Canopy Growth now has a net debt position despite entering a recreational cannabis launch in Canada with a cash investment of $4 billion.

Not rock bottom

The stock’s market capitalization is still close to $2 billion despite the business burning cash nonstop. Canopy Growth is still trading at a forward P/S ratio well above the largest MSOs in Coralif (OTCPK: CURLF) and True Cannabis (OTCQX: TCNNF).

Canopy vs. Peer Growth in PS Ratio
Data by YCharts

Remember that MSO has large adjusted profit margins while canopy growth has huge losses. An MSO like Curaleaf has huge catalysts for revenue growth from the Northeast markets opening up with New Jersey and New York as well as other state markets that provide the path for revenue and EBITDA to double over the next few years.

Canopy Growth still needs further business restructuring and proof to the market that the management team can indeed increase revenue in the face of significant cost reductions. SG&A expenses in the March quarter were C$117.6 million, and plans to cut up to C$37.5 million of these costs on a quarterly basis could disrupt revenue-generating operations and company morale causing top talent to leave the business further deteriorating. .

away

The takeaway for the lead investor is that Canopy Growth hasn’t hit rock bottom yet. The Canadian cannabis company still needs to demonstrate that the business model is operating with adjusted EBITDA losses occurring on a permanent basis despite previous restructuring plans.

Investors should not see a dip below $5 as a buying opportunity unlike other cannabis stocks with catalysts for a stock recovery.

Leave a Comment