Canopy Growth Corporation (TSX: WEED) is a Canada-based company, engaged in cultivating and selling medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow.   

Key Highlights:

• Decreased revenue: During FY22, the company reported a decline in the net revenue to CAD 520.32 million as compared to the total revenue of CAD 546.64 million in FY21. The net sales from the global cannabis sector went down to CAD 337.21 million in the reported period (FY22) against the net sales of CAD 378.68 million in the pcp, which impacted the overall sales.

• Decline in liquidity: In FY22, the company stated a decrease in the cash and cash equivalent to CAD 776.00 million against the cash and cash equivalent of CAD 1,154.65 million in FY21. Also, the cash flows used in the operation increased to CAD 545.81 million in FY22, against the cash flows used in FY21 of CAD 465.72 million. The decline in liquidity is a major concern for the company to manage its business operations smoothly and carry out its growth plans.

• Deteriorating profitability margins: During FY22, the company reported lower revenues, and higher cost of goods sold which resulted in the deteriorating profitability margins when compared to the industry median, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported decreased net revenue of CAD 520.32 million in FY22, against the net revenue of CAD 546.64 million the FY21. Also, the company reported net losses of CAD 302.18 million in the reported period (FY22) against the net loss of CAD 1,744.92 million in the pcp, along with a negative adjusted EBITDA of CAD 415.44 million in the reported period (FY22) against the negative adjusted EBITDA of CAD 340.31 million in FY21. Further, the group also reported declining liquidity in terms of cash and cash equivalent balances and increased use of cash from operating activities in FY22, which is a key concern for the company.   On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is trading at 4.2x as compared to the industry (healthcare) median of 3.2x, implying the stock is still overvalued. We have considered Curaleaf Holdings Inc., and Tilray Brands Inc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of WEED at the last closing price of CAD 4.88 on June 09, 2022.

One-Year Technical Price Chart (as of June 09, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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