Profitability For Canopy And Cronos Is Elusive, Plus Cannabis Headwinds In 2023

This was another challenging year for the legal cannabis industry.

In the U.S., there was no significant reform on the federal level — especially when it came to marijuana banking progress (although, there’s still a chance for this in the lame-duck). Cannabis de-scheduling also stalled.

Bank of America analyst Lisa K. Lewandowski said that the industry is still nascent, having potential for years of legal sales growth, pushed by the new legal markets and expansion in existing ones.

See Also: Booker Blasts McConnell For Halting Marijuana Reform And Saying 'Poison Pills' Shouldn't Be Part Of Bill

2023 Outlook

Lewandowski shared expectations for the industry in 2023, saying that “a variety of headwinds” can be expected for both Canadian and U.S. marijuana producers. Among major challenges but also milestones that could be expected, the analyst highlighted:

• Oversupply;
• Heavy taxation; 
• Economies of scale; 
• Capital challenges;
• Slow progress on the Federal front in Canada/US;
• New states legalizing medical or recreational cannabis; 
• Inflationary environment; 

Ohio, Minnesota, Hawaii, and Pennsylvania are among the states to watch out for next year, according to the analyst. They may consider going recreational, per Marijuana Policy Project.

The analyst also noted states that made some progress on legalization in 2022, such as Arkansas, Kansas, North Dakota, Delaware, South Dakota, New Hampshire, North Carolina, Oklahoma, South Carolina, and California.

Updated Ratings

Lewandowski reiterated an ‘Underperform’ rating for both Canopy Growth CGC and Cronos Group CRON.

On Canopy stock, the analyst lowered the price target to $2.23 from $2.56.

For downside risk to this price objective, the analyst notes “a continued challenging adult-use cannabis channel in Canada that limits sales development, management's inability to get costs right-sized for current category opportunities, and the opening of new legal cannabis markets slows over the next decade, thereby impacting future growth.”

Possible upside risks include better-than-projected sales and free cash flow and sooner-than-expected US federal legalization.

On Cronos stock, the analyst kept the same price target of $2.50.

Downside risks to the analyst price objective on Cronos stock include the underdeveloped adult-use program in Canada, accelerated cash burn, and longer-than-expected federal legalization in the U.S.

Upside risks count successful M&A, a faster path to profitability than anticipated, and earlier than expected entry into the U.S. market.

“While progress is being made by both Canopy and Cronos to right size their operations for current market conditions, while preparing for US legalization, we think profitability remains elusive until pricing pressures ease,” the analyst wrote in her Friday note. “Given oversupply of product, lack of barriers to entry in Canada, heavy taxation and consumer pressure given inflation and substitutes (i.e. the illicit market), we think meaningful progress will take time.”

Price Actions 

Canopy shares were trading 3.45% lower at $2.52 per share at the time of writing Friday morning.

Cronos shares were trading flat at $2.80 per share at the time of writing Friday morning. 

Photo: Courtesy of Esteban Lopez on Unsplash