As Canopy's Shares Dive Post-Earnings, Analyst Calls Stock 'Bellwether,' Sensitive To Fed Reform News

Canopy Growth Corporation CGC, announced its financial results Friday for the second quarter fiscal 2022 ended September 30, revealing a 3% year-over-year decline in net revenue to CA$131 million ($105.4 million).

Total net cannabis revenue increased by 1% over the same period reaching CA$95 million in the second quarter of 2022.

The company also reported an adjusted EBITDA loss of CA$163 million for the same period, representing a CA$77 million wider loss versus the same period of last year, which can be attributed to lower sales, a decline in gross margins, partially offset by the reduction in our total selling, general and administrative expenses.

In addition, Canopy pushed out a positive Adjusted EBITDA target.

The Analyst

Cantor Fitzgerald’s Pablo Zuanic kept a ‘Neutral’ rating and the same price target of $CA18.50 on Canopy’s stock post-earnings release.

The Thesis

“Management had guided for a down quarter, but sales still came in lower than FactSet consensus ($131 million versus $140 million) and adjusted EBITDA of -$76 million was worse than consensus of -$51 million,” the analyst highlighted.

According to Zuanic, more concerns raise the double-digit decline in domestic business-to-business cannabis sales and ongoing share loss.

Canopy withdrew guidance for break-even EBITDA this March, and now it is pushing back the break-even EBITDA target because of “Canada supply challenges and delayed revenue ramp in the US (BioSteel related); it did not indicate what is the new timetable.”

What’s more, the previous $250 million quarterly revenue base has also been pushed back. In a previous analyst note, ahead of the earnings release, Zuanic noted that the company’s non-cannabis business, more specifically BioSteel, could end up being a key driver in the path to $250 million in sales.

Now, the analyst is waiting to “get more color on the bridge from $131 million to $250 million,” in a post-earnings conference call.

Plans For Improvement

Canopy’s management announced it is working on enhancing Canadian performance, and that it still expects revenue improvement for the second half of 2022, just less than before. It is counting on product innovation, while also targeting cost savings of $150-200 million by Sep 2022. Its key goal in cannabis flower is to achieve great THC potency and lower growing expenses.

“We rate the stock Neutral, but we realize it is a bellwether stock, in a momentum sector, more sensitive than most to news flow about federal changes in US regulation. We believe CEO David Klein has the backing of Constellation Brands STZ (he was a well-regarded CFO there) and the Canopy Growth Board of Directors, so we do not expect disruption to the strategic plan he is implementing,” Zuanic concluded.

The Price Action

Canopy Growth’s shares were trading 11.99% lower at $11.67 per share at the time of writing Friday morning.

Photo: Courtesy of Elsa Olofsson on Unsplash