Canopy Growth Corp.

Canopy Growth Corp. (TSX: WEED) is a Canadian company that cultivates and sells medicinal and recreational cannabis and hemp through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow.

Key Highlights 

• Plans to Acquire Wana Brands: Recently, the company stated that it plans to acquire Wana Brands, the leading cannabis edibles brand in North America based on market share, with a profitable business and track record of generating substantial revenue growth and category-leading gross and EBITDA margins. We furthermore believe that Wana's leadership position and ongoing expansion across the US would bolster WEED's product, brand, and geographic exposure to the US cannabis market upon federal permissibility.
  

• Strengthen its Flower Portfolio: With a volume rise of 12% over Q1FY22, the Canadian premium flower market continues to develop, accounting for more than 25% of all recreational market flower sales in Q2. The company strengthens its flower portfolio in response to customer demand, focusing on improved growing techniques and stringent quality control while increasing its range to produce exceptional genetics, with multiple dried flower and pre-roll joint launches planned for 2022.

• Growth Opportunities in the US: WEED is still bullish about its growth prospects in the United States, for both its BioSteel ready-to-drink (RTD) beverages and its CBD brand portfolio. Brand recognition grows, velocity is on track to meet targets, and distributor and store response has been excellent. In addition, increased listings with national and regional chain accounts are projected to boost BioSteel's distribution in the remainder of FY22 and into FY23.

• Growing Traction from Beverages and Cannabis-Infused Edibles: The company is witnessing strong growth from the cannabis-infused edibles and beverage segments, supported by innovative product offerings and lucrative packaging. It also expanded its popular Twd. Gummy line and introduced new flavors. In addition, within the beverage segment, WEED launched Tetrahydrocannabinol (THC) beverages to cater to the growing demand. Notably, the beverages, edibles, topicals & vapes segment reported an income of CAD 9.18 million, reflecting a 15.2% growth on a y-o-y basis.

Financial Overview of Q2FY22 (in thousands of CAD)

Source: Company

• The company announced its quarterly results, wherein it posted net revenue of CAD 131.4 million, against CAD 135.3 million in pcp. The decline was supported by lower B2B and B2C contributions and weak performance from other consumer products.
• On the back of the higher cost of goods sold at CAD 202.5 million against CAD 109.2 million in pcp, the group posted a gross loss of CAD 71.1 million compared to a profit of CAD 26.1 million in the previous corresponding period.
• The quarter was marked by lower selling, general & administrative expenses and minimized asset impairment and restructuring costs. As a result, total operating expenses stood lower at CAD 144.2 million, significantly lower than CAD 310.3 million in pcp.
• Operating loss squeezed to CAD 215.4 million, from CAD 284.3 million in pcp.
• The group minimized its net loss to CAD 11.1 million, compared to CAD 32.1 million in Q2FY21.

Risks Associated with Investment

The group's products might face competition from other brands, which may lead to a decline in market share. Moreover, due to the lengthy procedure of product approval and product innovations, along with an increase in the higher input costs, the company might witness a subsequent fall in profitability and margins.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation

On the bright side, the company continues to expect revenue acceleration in the remainder of FY22, along with stabilizing its market share of the Canadian recreational cannabis at the same time. Additionally, it is focusing on marking its footprint across the US market and has built-out multiple routes for the THC market within the country. Moreover, it is focusing on taking advantage of additional opportunities in the US market through the acquisition of Wana Brands. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing price of CAD 14.72 on November 23, 2021. For comparison purposes, we have considered peers such as Brown-Forman Corp and Lexaria Bioscience Corp.

Disclaimer

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