This Is The Hidden Upside Driver For Canopy Growth's Stock, According To A Leading Analyst

Since the beginning of the year, Canopy Growth CGC shares have dropped from 14.03% to $8.00 per share.

The company began 2022 with the issuance of its Environmental, Social and Governance (ESG) report for the calendar year 2020, describing Canopy's commitment to sustainability practices.

It continued with two recent product launches – Martha Stewart CBD Wellness Topicals in collaboration with Martha Stewart and enhancement of the Tweed brand. 

About two weeks ago, the Ontario-based cannabis giant released its financial results for the third quarter fiscal 2022 ended December 31, 2021, revealing a decline of 8% sequentially in net revenue to CA$141 million ($111.12 million).

The company’s potential was recognized some five years ago by a leading alcohol company, Constellation Brands, Inc. STZ, which then bought a 9.9% stake in Canopy. Since then, Constellation Brands increased its stake several times to reach 38.6%.

The Analyst

Cantor Fitzgerald’s Pablo Zuanic kept a ‘Neutral’ rating on Canopy's stock but raised price target to CA$11 from CA$9.60. 

The Thesis 

A higher price target comes with the analysts’ new approach to value, reflecting also the contingent stakes in U.S. cannabis assets. In addition, Zuanic also factored Cantor’s new and raised CPG sales estimates. 

“As per our math, Canopy Growth's core cannabis business are valued at 11x CY22E sales and 10x CY23E; in both cases, this is well above the peer average. Only Tilray TLRY comes close (8x CY23E); Aurora ACB is at 5x CY23E and the rest of the Canadian group is mostly at 1-2x CY23E sales,” the analyst noted.

The stock’s potential also lies in potential future moves from Constellation Brands. According to Zuanic, there’s more sense for Constellation Brands to buy all the Canopy Growth “float” than wait to use the warrants.

“According to Bloomberg, Constellation Brands and Monster Beverages MNST are in 'merger discussions'...we assume the much bigger scale of that combined company could make it easier to acquire Canopy Growth eventually,“ the analyst explained. 

The Price Action 

Canopy Growth shares were trading 1.90% lower at $7.99 per share at the time of writing Friday morning.