Canopy Growth Corporation (TSX: WEED) is diversified cannabis, hemp and cannabis device company, which offer distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms, as well as medical devices.

Investment rationales

• Launch of THC-infused beverages carrying the potential to be a game-changer in the U.S. cannabis and the company is quite bullish on the growth of its unique beverage offerings to its core markets.
• Strong bullish trend, with the price hovering above the short-term, as well as long-term support levels of 5-day, 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs. Also, the moving averages are rising higher, which is another bullish indicator.
• Further, the Moving Average Convergence Divergence (MACD) is rising and oscillating above the 9-days SMAs, with the difference between 12-day, and 26-day EMA is positive another bullish indicator.
• Strong Liquidity, with Current Ratio at the end of June quarter, stood at 8.18x, whereas industry median stood at 3.19x.
• Lower debt contribution in the capital structure, with the Debt/Equity ratio of 0.13x at the end of June quarter, whereas industry median debt/equity ratio, stood at 0.41x.

Recent Development

• On October 01, 2020, WEED and Acreage Holdings announced the implementation of their amended arrangement, in which Acreage has developed a plan to market Canopy Growth's diverse beverage portfolio in the United States. Acreage anticipates launching Canopy Growth's select, sessionable THC beverage formulations in summer 2021.

Q1FY21 Financial Highlights:

• WEED reported solid top-line growth in the first quarter of FY21, with Net revenue soared by 22% to CAD 110 million driven by higher medical cannabis sale in Canada and Germany.
• Gross margin slumped to CAD 6.5 million, from CAD 18.3 million in the same period of the corresponding financial quarter, under-utilization of the group's large-scale infrastructure.
• Total operating expenses remained lower at CAD 178.871 million, declined 23% against the same quarter of FY19, driven by year-over-year reductions in Sales & Marketing expenses, and partially offset by higher General & Administrative and Research & Development related costs.
• However, operating losses lowered to CAD 172.38 million, as compared to CAD 214.72 million in Q1FY19.
• The company reported a net loss of CAD 128.3 million, which was 34% lower against the CAD 194.05 million in the corresponding previous quarter of FY19.
• Cash and cash equivalent stood at CAD 975.87 million vs CAD 1,816.63 million a year-ago period.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: The next wave of COVID-19 pandemic may disrupt the group’s operations and those of its suppliers and distribution channels and negatively impact the use of our products, consumer demand for cannabis and hemp products

Stock Recommendation: Weed shares were trending higher on the TSX, with prices increases ~26% in the past five trading sessions, and approximately 11% over the past 1-Month. More importantly, its shares are hovering in a bullish trend with stock traded above the crucial short-term and long-term support levels of 50-day and 200-day SMAs. Further, the launch of THC-infused beverages carrying higher potential to be a game-changer in the US cannabis market and the company is quite bullish on the growth of its unique beverage offerings. Also, the company’s financials are improving gradually, with solid growth reported in the top-line, and narrowing losses. On the valuation front, WEED’s shares are trading at an EV to Sales multiple of 17.1x on TTM basis, as compared to the industry (Pharmaceuticals) average of 54.5x. Therefore, based on the above investment rationale, risks associated, recent price momentum and a discounted valuation multiple, we have recommended a ‘Buy’ rating on the stock at the closing price of CAD 24.09 on October 14, 2020.

1-Year Price Chart (as on October 14, 2020). Source: Refinitiv (Thomson Reuters)

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