Canopy Growth: Cannabis Rally Loses Steam On Long-Term Uncertainty (Hold) (NASDAQ:CGC)
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Canopy Growth (NASDAQ:CGC) is down 18%-19% since I last covered the company in April. Over the last three months, it has been up 161% and a leader in the cannabis rally. The company’s recent Q4-2024 report, released May 30th, showed continued financial recovery and slightly improved financial performance. The current investor sentiment has been bearish on cannabis, while news of rescheduling is awaited. The cannabis rally has lost steam this summer, although it may come back.
Canopy Growth has reported new developments with Canopy USA and its acquisition of US cannabis operations. The company is also showing some improvements across its operating segments. The news has not been impressive enough to move the stock price higher. Most of the cannabis stocks are down at the moment.
I continue my previous rating of a Hold, but it comes at a higher risk as the stock price continues to decrease and the stock market rally fizzles out. News of rescheduling of cannabis in the US will be the next synergizing move for the industry. Canopy Growth is well-positioned to benefit from the change in policy. Canopy USA has already acquired some US THC assets.
News of Rescheduling and Canopy USA
The US THC-based cannabis industry expects news on the rescheduling of cannabis sometime over this summer. Currently, the new ruling for rescheduling is under review and allowing public comments. The news has been positive overall, but there are still reports that the DEA is not fully onboard or supportive of the change.
Even after the change, the industry will benefit more from federal legalization / decriminalization. It is unclear when such a radical move will occur for the US government. Meanwhile, the SAFER Banking Act and other pro-cannabis legislation stalls out in Congress and the Senate. To make matters worse, there are stories out about the poor performance of US cannabis markets.
Canopy Growth has shown improvement in navigating the Canadian cannabis markets. The company also shows growth potential in its international cannabis exports. Canopy USA is another aspect of the company with huge growth potential. Canopy USA recently acquired Acreage Holdings (OTCQX:ACRHF), Wana Wellness, and The Cima Group. All three companies are now subsidiaries of Canopy USA.
Canopy Growth will show investment revenue on its financials from these businesses. In the future, when US policy changes, Canopy Growth will directly control these companies. There are additional US assets which the company has either acquired or will acquire soon, for instance Lemurian (Jetty Extracts) and Mountain High Products. Canopy Growth will continue to acquire US assets through Canopy USA.
Q4-2024 Results
Canopy Growth released its Q4-2024 on May 30, 2024. The company reported net revenue of CA$73 million, representing a 16% increase YoY and a 7% decrease QoQ. The company reported Q4 consolidated gross margins of 21% compared to 11% from the same quarter last year.
The company saw an increase in revenue for all of its operating segments YoY.
Revenue by Segment (CA$ Millions) | Q4 2024 | Q3-2024 | Q4 2023 | YoY | QoQ |
Canada Cannabis | $37.08 | $39.03 | $35.73 | 3.8% | (5%) |
Rest-of-world cannabis | $11.65 | $10.53 | $8.77 | 32.8% | 10.6% |
Storz & Bickel | $22.15 | $18.45 | $15.49 | 20% | 43% |
Other | $2.12 | $2.3 | $1.33 | — | — |
Total Net revenue | $73.0 | $78.5 | $61.32* | 16% | (7%) |
*Q4-2023 contains revenues from discontinued operations. Data from Canopy Growth.
Canopy Growth showed improvements in revenue from Storz & Bickel with its new and popular flower vapes. The company saw an increase in international cannabis exports and expects the demand to increase in Poland and Germany. The company boasted international cannabis margins of 40%.
Canadian cannabis revenues overall increased, but B2B adult use revenue was down 4% due to supply constraint. Canadian cannabis gross margins were zero for Q4. Canopy Growth attributed the issue to lower flower yields. The company is in the process of revamping its Kincardine grow facility with LEDs and larger plant capacity. It has also installed new pre-roll machines to keep up with the increasing demand of the pre-roll Canadian market.
The market estimate for Canopy Growth’s Q1-2025 report is CA$72.4 million, which represents a slight decrease QoQ and YoY. The company has increased distribution of its flower and beverage brands during Q4, which should amount to higher Canadian cannabis revenues.
For Q4-2024, the company reported a net loss of CA$92.3 million, which marks an improvement QoQ and YoY. During PY2024, the company paid down debt to CA$597 million and the next year for debt maturity is 2026. The company reported CA$205 million in cash and short-term investments.
Historical Financial Performance and Valuation
Amount in CA$ Millions | Q4-2024 | Q3-2024 | Q2-2024 | Q1-2024 | Q4-2023 | |
Revenue | 72.8 | 78.5 | 69.6 | 76.3 | 73.7 | |
Cost of Revenue | 57.6 | 50.3 | 46.9 | 62.5 | 103.0 | |
Gross Profit | 15.2 | 28.2 | 22.7 | 13.8 | (29.3) | |
Operating Expenses | 48.3 | 53.1 | 49.8 | 57.6 | 110.2 | |
Operating Income | (33.1) | (24.9) | (27.1) | (43.8) | (139.5) | |
Net Income | (92.3) | (216.8) | (310.0) | (38.1) | (711.6) | |
Cash / ST Investments | 205.8 | 188.4 | 272.2 | 573.0 | 784.3 | |
Accounts Receivables | 51.8 | 87.8 | 88.0 | 142.9 | 149.6 | |
Current Assets | 371.2 | 397.3 | 493.7 | 883.2 | 1,077.3 | |
Total Assets | 1,300.3 | 1,359.8 | 1,668.2 | 2,190.5 | 2,439.1 | |
Accounts Payable | 28.7 | 25.8 | 22.7 | 57.6 | 76.2 | |
Current Liabilities | 234.7 | 221.3 | 196.3 | 451.2 | 803.8 | |
Total Liabilities | 799.8 | 815.1 | 918.8 | 1,343.0 | 1,679.1 | |
Book Value Per Share (US$) | $5.49 | $4.96 | $6.65 | $10.19 | $10.85 | |
Average Price Target Per Share | $5.70 | |||||
Current | ||||||
NTM Total Enterprise Value / Revenues | 3.94x | 5.28x | 3.49x | 3.34x | 2.11x | 4.12x |
*data from Seeking Alpha and TIKR
Canopy Growth has undergone right-sizing and other changes to its business strategy over the last two years. The results are slowly showing as net loss and operating costs are decreasing, but there is still room for improvement. The company has continually reported net loss for the last two plus years. Investors would want to see this trend change and for the company to report free cash flow from operations.
Although its forward multipliers show the company to be somewhat undervalued, the company’s stock price is currently trading higher than its book share and median target share. The stock price is overvalued or overperformed and mostly indicates high investor sentiment for the company. Setting aside the long history of net loss, the company is well positioned for future growth. It will take more time for its financial performance to swing in the other direction into net gain.
Stock Price Performance
www.stockcharts.com
*Six-month stock price chart from StockCharts.com
The stock underwent a reverse split back in December. The stock then rallied in March and found a higher price channel between April and June. The price has come down from its recent highs for the month of June. The price has stayed between $7.50 and $10.50 for the last few months. My rating of a hold assumes that the price will stay within this new channel.
The stock price is up YTD 42%, 6-mo 33%, and 3-mo 161%. It is down 25% over the last thirty days. Momentum has increased for the stock, and it is currently devoid of short-squeeze conditions. The Hold rating comes with the risk that the stock will drop below $7 per share before increasing again. In my opinion, one should wait and see where this next rally brings the price and whether it finds an even higher price channel.
Comparison to Peers
Numbers reflect last quarterly report per company* | SNDL (SNDL) | Tilray (TLRY) | Canopy Growth (CGC) | Village Farms (VFF) |
Revenue CA$ million | 197.8 | 255.6 | 72.8 | 105.8 |
Cash and ST Investments | 202 | 306 | 205 | 36 |
Total Assets | 1741 | 5717 | 1300 | 621 |
Net Income or (Loss) | (2.6) | (125.8) | (92.3) | (3.9) |
Book Value per Share (US$) | $3.43 | $4.34 | $5.49 | $2.69 |
Current Price Per Share (US$) | $1.95 | $1.70 | $7.24 | $1.00 |
Median Price Target (US$) | $3.62 | $2.37 | $5.49 | $2.17 |
My Rating | Buy | Hold | Hold | Buy |
*Data from Seeking Alpha
I am covering these four companies on a regular basis. Canopy Growth is outperforming its peers on the stock market, but its stock price is overvalued, and financial performance is average. Its peers, SNDL and Village Farms, are trading at an undervalued price in the stock market, while their financial performance is better than their peers.
Each company has its own inroads into US THC cannabis markets. In addition, Canopy Growth, Tilray, and Village Farms have firm cannabis international export strategies in place. I believe these four companies will turn into the long-term winners of the industry.
Risk and Investment Strategy
Canopy Growth has enough resources to continue its current business strategy. It is well-positioned for US and international expansion. Change in US cannabis policy or European policy will increase the long-term value of Canopy Growth’s business strategy. The company is at low-risk of poor financial performance.
A long-hold strategy for Canopy Growth’s stock comes at a moderate to high risk. Any bad news in the US, Canadian, or European cannabis markets will cause the stock price to drop. Cannabis stocks have recently undergone a rally, but larger market volatility and low summer volume will continue to bring the price down. There is a risk that the price will drop before it rises again.
The light at the end of the tunnel will be when the company’s stock price stabilizes over $12 per share. It may take some time for this to happen. I have been holding Canopy Growth since pre-COVID when the price was $2 per share. I held this stock through its historical rally to $60 per share and then its historical drop below $.50 per share. I am still here holding post-split and seeing the price recover from the split.
Conclusion
Canopy Growth is well-positioned for entrance into US THC cannabis markets and for expansion of European cannabis markets. The company is still performing strong in its native Cannabis markets. Canopy Growth’s commitment to right-sizing is beginning to show with the company’s improved financial performance. The conditions are not perfect for Canopy Growth and its stock is currently losing steam along with the rest of the cannabis stocks. I reaffirm my rating of a Hold and recommend that investors watch developments from the company and the emerging industry.
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