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 Updates: 

• Ample liquidity to support future operations: The company reported impressive liquidity of cash & cash equivalents CAD 807.6 million, while its short-term investments were accounted at CAD 1.2 billion. The company has the additional option of CAD 40 million of revolving debt facility along with USD 500 million under the credit facility. We believe the above is sufficient to meet the working capital requirements and conduct expansion strategies.

• New product offerings: Recently, the company expanded its product line through new offerings of Jet Fuel Cookies – a limited-edition strain within its 7ACRES Craft Collective brand. Additionally, the company introduced two new national strains – DOJA 91K and DOJA Sour Kush under its DOJA brand. The above would cater to the growing consumer demand for flower products, which is a key positive.

• Growing Traction from Beverages edibles, topical and vapes segment: During H1FY22, the company reported a solid growth from edibles, topical and vapes products, both from its recreational and medical cannabis segments. Notably, during the period, the company reported a revenue of CAD 12.350 million from beverage, edibles & topical vapes products under the medical cannabis segment, significantly higher than CAD 1.827 million in pcp. Continuation of the above trend is likely to support the upcoming performance.

Source: Company Report

Q2FY22 Financial Highlights:

• WEED announced its quarterly results, wherein the company posted net revenue of CAD 131.374 million, as compared to CAD 135.266 million in pcp. The slight decline was primarily due to lower income from the Storz & Bickel segment (CAD 14.511 million v/s CAD 21.836 million in pcp).
• The company reported a considerable surge in cost of goods sold (CAD 202.514 million v/s CAD 109.186 million in pcp). Hence, the group reported a negative gross margin of CAD 71.140 million, as compared to a gross margin of CAD 26.080 million in pcp.
• However, the corporation reported a slide in selling, general & admin expenses and a fall in share-based compensation costs. Moreover, asset impairment and restructuring costs stood significantly higher than the previous period. Total operating expenses stood lower at CAD 144.219 million, as compared to CAD 310.345 million in pcp.
• Net loss lowered to CAD 16.331 million, from a loss of CAD 96.552 million in pcp.

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks: The products of the group might face competition from other brands, which might lead to a decline in market share. Moreover, a change in consumer preference might lead to lower market share and lower sales volume. 

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation

In the recent past, we have seen higher consumer demand for the cannabis products like dry buds, beverages, vapes etc. which led to improved topline for the company. In order to cater to the growing demand, the company growing consumer demand, WEED has added new variants under its already established brand, which is a key positive.

We have valued the stock using the EV to sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers Aurora Cannabis Inc, Lexaria Bioscience Corp Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 12.85 on December 03, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on December 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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