A recent company note fromPiper Sandler & Co, by senior analysts Michael S. Lavery and Luke Maloney offers insights into Canopy Growth Corporation's (NASDAQ: CGC) financial performance, valuation and prospects.
The near-term outlook remains cautious, with significant valuation adjustments and an "Underweight" rating from Piper Sandler. Despite positive revenue trends amid economic challenges, investors should note ongoing efforts to achieve profitability, potential regulatory impacts and market focus shifts.
Financial Performance And Projections
Canopy Growth'sfinancial results for fiscal year 2024 show net revenues of C$72.9 million, surpassing the estimate of C$69.5 million. However, EBITDA was significantly below expectations. The company aims to achieve positive adjusted EBITDA by the second half of fiscal year 2025 with estimates of C$0.8 million in the third quarter and C$1.4 million in the fourth quarter.
Piper’s company note procured by Benzinga Cannabis revises the company's revenue projections, lowering the fiscal year 2025 estimate from C$304 million to C$297.8 million and the fiscal year 2026 estimate from C$343.9 million to C$322.3 million. The projected earnings per share (EPS) for the fiscal year 2025 is C$(1.63) and for the fiscal year 2026 is C$(1.50).
The company's revenue for the fourth quarter of 2024 includes 33% from non-cannabis segments with Storz & Bickel sales increasing by 43% due to distributor and retailer demand. However, the Other segment sales declined by 44% due to the divestitures of BioSteel and This Works.
“[Canopy] has no debt maturities until March 2026, though we expect it to continue issuing shares to pay down debt (its share count has roughly doubled in the last six quarters),” reads the report.
Current Valuation And Target Price
As of May 30, 2024, Canopy Growth Corporation is rated "Underweight" by Piper Sandler with a current stock price of US$8.48 and a target price of $3.00.
Piper Sandler’s valuation approach involves estimating the 2025 sales at $235 million and applying a multiple of two, resulting in a target valuation of $470 million, approximately twice the estimated 2025 sales.
The 89 million shares outstanding translates to a target market capitalization of $267 million, or $3.00 per share.
This conservative target price reflects the firm's assessment of Canopy Growth’s financial health, which includes cash reserves of approximately $155 million and a debt load of around US$435 million.
The significant debt relative to cash reserves raises concerns about the company’s ability to manage its obligations, contributing to the "Underweight" rating.
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‘Largely Symbolic’
The report discusses the impact of cannabis rescheduling from Schedule I to Schedule III, noting that the change does not legalize cannabis at the federal level nor resolve financial service issues for cannabis businesses.
“The rescheduling of cannabis from Schedule I to Schedule III is largely symbolic and would still require a company to submit a new drug application to the FDA for approval of any cannabis-based drug and would require patients to obtain a prescription to get the drug,” reads the report.
However, it offers tax benefits by eliminating the 280E tax penalty, which positively affects Canopy USA.
Focus On Canada And International Markets
Canopy Growth has streamlined its portfolio through divestitures, focusing on becoming an asset-light, cannabis-centric company. Its primary market remains Canada, but it also sees potential in markets like Germany, Australia, and Poland, provided margins are better than in Canada.
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