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

Key Highlights

• Expanding flavor portfolio: Recently, the company revealed the latest expansion and flavor innovation within its growing CBD portfolio - Tropical Medley CBD Wellness Gummies. The new product offering features three brand-new flavors inspired by the lush fruits of tropical destinations - Alphonso Mango, Coconut, and Pineapple.

• Growth prospects in the U.S: BioSteel and Storz & Bickel ("S&B") both had record quarterly sales in Q3 FY2022, owing to BioSteel's expanding distribution and S&B's new product releases. The Company is bullish with its growth prospects in the United States, for both its BioSteel ready-to-drink beverages and its CBD brand portfolio.

• Divested pharmaceutical C3 Cannabinoid Compound Company: The company divested its subsidiary business, C3 Cannabinoid Compound Company GmbH, to Dermapharm Holding SE a European pharmaceutical company headquartered in Grünwald, Germany and received a cash payment of CAD 128.3 million.

• Plans to acquire Wana Brands: Recently the company stated that it plans to acquire “Wana Brands” a leading cannabis edible brand based in North America, with the profitable business and a track record of generating strong revenue growth and category-leading gross and EBITDA margins. We furthermore believe that Wana’s leadership position and ongoing expansion across the U.S. would bolsters company’s product, brand, and geographic exposure to the U.S. cannabis market upon federal permissibility. 
  

Risks associated with investment 

The group's products may encounter competition from other brands, resulting in a loss of market share. Furthermore, the company's profitability and margins may suffer as a result of the prolonged process of product clearance and new improvements, as well as an increase in higher input costs.

Financial overview of Q3 FY22 (In thousands of CAD)

Source: Company Filing

• The company announced its quarterly results, wherein it posted net revenue of CAD 140.9 million, against CAD 152.5 million in pcp. The decline was attributable to a decrease of 20% in its global cannabis segment, primarily due to decline in across its organic Canadian recreational and medical businesses and C3.

• On the back of higher cost of goods sold at CAD 130.8 million against CAD 127.9 million in pcp, the group posted gross profit of CAD 10.0 million compared to CAD 24.5 million in the previous corresponding period.

• The quarter was marked by lower selling, general & administrative expenses along minimized asset impairment and restructuring costs. As a result, total operating expenses stood lower at CAD 160.0 million, significantly lower than CAD 578.1 million in pcp.

• Operating loss squeezed to CAD 149.9 million, from CAD 553.6 million in pcp.

• The group minimized its net loss to CAD 108.9 million, compared to a net loss of CAD 904.3 million in pcp.
  

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group 

Stock recommendation 

The Company expects revenue to accelerate in the second half of FY2022, while also stabilizing its market share of Canadian recreational cannabis, which is a critical positive. Furthermore, BioSteel and Storz & Bickel ("S&B") achieved record quarterly revenue during Q3 FY2022, driven by expanded distribution of BioSteel and new product launches for S&B; additionally, the group is marking its footprints across the United States market and has built-out multiple routes for the THC market within the country.

Furthermore, the company continues to minimize its operational expenses and capital investments during fiscal 2022. It is focused on attaining profitability in Canada with a renewed sense of urgency by taking extra steps to simplify the business and minimize expenses while making strategic investments in key growth areas. Hence, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the current market price of CAD 8.06 at 9:50 AM Toronto Time on April 11, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

Disclaimer

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