‘From bad to worse’: Analysts slash Canopy Growth price targets

Analysts are slashing their price targets on shares of Canopy Growth Corp. (WEED.TO)(CGC) after quarterly results fell short of expectations on multiple fronts.

The Smiths Falls, Ont.-based cannabis producer’s fiscal first quarter was marked by declining revenue, shrinking gross margins, waning market share and a hefty $1.28 billion one-time accounting charge. The company said it expects profitability could be as much as five years away.

“Among the seven licensed producers that have thus far reported calendar 2Q19 earnings, WEED is one of only two (the other being Organigram) to post a sequential revenue decline,” Cowen analyst Vivien Azer wrote in a research note.

She cut her price target for Canopy Growth shares to $48 from $82 while maintaining an “outperform” rating.

Azer notes Canopy Growth’s revenue now lags behind rivals Aphria Inc. (APHA.TO)(APHA) and Aurora Cannabis Inc. (ACB.TO)(ACB) Her latest commentary on Canopy, titled “From bad to worse . . . What’s next?” lowers estimates for revenue and EBITDA for fiscal 2020.

“One of the most surprising revelations in the quarter was the 14.6 per cent reported gross margin, which contracted 130 basis points sequentially. On WEED's prior earnings call, management noted that absent stranded overhead, WEED's gross margin would have been 41 per cent,” Azer wrote. “We have an increasingly hard time understanding this disconnect, given that kilograms harvested grew 183 per cent sequentially, and 323 per cent year-over-year.”

The pot giant said it lost Canadian recreational market share in the last eight months as rivals ramped up supply.

"We are decreasing our price target as the lacklustre performance in recreational market sales could indicate that Canopy has lost the leading position," GMP Securities analyst Ryan Macdonell wrote in a research note.

Canopy Growth booked a gross revenue adjustment of $8 million ($6.4 million after excise taxes) in the quarter, citing the risk of “oversupply of certain oil and gel-cap formats in certain markets.”

Macdonell calculated that 23 per cent of the company's third-quarter and 50 per cent of its fourth-quarter recreational market volumes were extract products, and those accounted for an average of seven per cent of sell-through volume in the recreational market since inception.

He slashed his stock price target to $45 from $65 while maintaining a “buy” rating.

BMO Capital Markets analyst Tamy Chen sees Canopy Growth’s slowing recreational revenues in the quarter partially stemming for a “suboptimal production and inventory mix.”

Chen lowered her revenue and EBITDA forecasts, as well as her price target on the company shares to $40 from $60.

Canopy Growth management partially blamed the slow roll out of brick-and-mortar retail stores in Ontario and Quebec for holding back revenue in the first quarter. However, CIBC World Markets analyst John Zamparo suggests the decline “amounts to an unsustainable market share from the onset of adult-use legalization, with competitors now having improved their offering, likely driving WEED’s share to 20 to 25 per cent.”

He reduced his price target to $50 from $80 with an “outperformer” rating.

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