Canopy Growth Stock – Latest Trends & Insights January 2020

The world's largest cannabis company – Canopy Growth (NYSE:CGC) has always been an industry leader. The first to list on a Canadian exchange. The first to be valued at over CAD$1 billion, and the first to list on the NYSE. 

Canopy Growth (NYSE:CGC) is the market leader in almost all areas, no matter what metric you consider. They currently possess the largest cultivation footprint in the cannabis sector, with over 5 million square foot of licensed capacity across the globe.

And with the largest share of the Canadian recreational cannabis market and the largest number of registered medicinal patients in Canada, CGC is still the number one player in the industry.

Canopy Growth was born out of Tweed Marijuana, which set up shop in 2012 in Smiths Falls, Ontario in the old Hershey's chocolate factory. The company then changed its name in 2015 to Canopy Growth Corporation, to better reflect the various companies that operated under its "canopy".

Canopy Growth is one of the most globalised cannabis companies

The company has a partnership agreement in Spain with pharmaceutical producer Alcaliber SA, and a subsidiary in Germany – Spektrum Cannabis – that imports medicinal cannabis for the German market. In addition, CGC has partnerships in Jamaica, Lesotho, Chile, Brazil and Australia. Although just recently, Canopy sold its cornerstone shares in Auscann, as it looks to be more strategic with the deployment of capital.

Canopy Growth is proudly dedicated to educating healthcare practitioners, conducting robust clinical research, and furthering the public's understanding of cannabis. Additionally, the company has devoted millions of dollars toward cutting edge research and commercial IP development through its partly owned subsidiary, Canopy Health Innovations.

Through its partly owned subsidiary, Canopy Rivers Corporation, the company is also providing resources and investment to new market entrants and building a portfolio of stable investments in the sector.

Canopy Growth's acquisition spree

One of the biggest issues facing Canopy Growth stock is this "Frankenstein" amalgamation of the many acquisitions that they have made over the last year or two.

Whereas Aurora has created the benchmark for excellence when it comes to integrating acquisitions, Canopy has seriously lagged in this department. In fact, this ended up being a major contributing factor to the recent Canopy Growth stock price meltdown.

Most of the acquisitions were made in a time when the market was flying and hence were executed at significant premiums. The company embarked on a spree of acquisitions following Constellation Brands' second investment of $5 billion in October last year.

Instead of using this capital to create better-operating leverage, the company chose to use this war chest to go on a shopping spree that has created significant structural inefficiencies, caused the Canopy Growth stock price to take a hammering.

CGC's acquisition of Hiku Brands

In anticipation of Canada's legalisation of recreational cannabis in 2018, CGC purchased Hiku Brands. Hiku was an amalgamation of Tokyo Smoke, a chain of coffee shops that also sold cannabis products. The company now has 6 cannabis shops and 5 coffee shops.

CGC paid CAD$326 million for the "coffee shops and brands" in July of 2018. This purchase however, was made in the height of a cannabis bull run, and CGC significantly overpaid for an asset that was producing very little revenue.

Canopy Growth acquires Hiku Brands

The deal – an all-stock one – saw Canopy Growth pay 0.046 Canopy Growth stock for each Hiku share. The actual price at the time was substantially higher, pushing the transaction to just north of CAD$600 million.

However, it's a different story if one considers Hiku's sales figures at the time, which saw the company take in $317,288 for the quarter ending June 30th. If you make use of an annualised figure, Canopy Growth—using its CGC stock—paid 460x sales for Hiku, or approximately CAD$54 million per store – crazy right?

If you keep all this in mind, one starts to get a clearer picture of why Bruce Linton was fired. Especially if you consider that Canopy Growth already had its own chain of Tweed stores, and they ended up paying considerably more for another chain of stores.

But it gets worse.

CGC acquires Acreage Holdings to enter the US

In April of 2019, CGC acquired Acreage Holdings, a US Multi-State Operator (MSO). Although, technically, they didn't actually buy Acreage Holdings, but rather paid USD$300 million for the "right" to acquire Acreage for a whopping USD$3.4 billion within a 7 year period. 

In its last earnings results, Acreage Holdings reported USD$17.7 million in revenue. If we annualise this again, then CGC paid 72x sales. Again, a crazy price for the right to enter the US. Let's not even go down the path of whether this was the right MSO for them to purchase. Although initial the Canopy Growth stock price soared on the news, it has since declined radically as investors and shareholders realised the dilutive effect on the CGC stock price.

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Breaking News: Bruce Linton gets fired

As Highlander famously said, "there can be only one", and this has always been Canopy Growth. The global behemoth was founded in the small town of Tweed—where the abandoned Hershey's chocolate factory stood barren—before the vision and drive of one man, Bruce Linton, grew it into a $15 billion dollar business in only 5 years.

Bruce Linton is fired from Canopy Growth

But, no matter how big they are, the fable of David and Goliath tells us that the right hit at the right time can topple even the greatest. In this case, Bruce Linton, the founder, visionary, and global commercial rockstar was fired. Gone, immediately. 

David Klein Canopy Growth CEO
Canopy Growth CEO David Klein

No one fires their CEO when they are kicking ass. If a CEO is fired straight after a quarter, then it stands to reason that the coming quarter is not going to be much better. This was off the back of a pretty average Q1 for Canopy, where losses and burn grew ever larger by the quarter. Constellation had simply had enough.  The markets were rocked by the termination of Bruce Linton, and the Canopy Growth stock price subsequently softened.

Subsequent to this, and at the end of 2019, Constellation announced that the new CEO would be David Klein. Klein, who has significant C-level experience, particularly in the role of CFO, has been brought in to stop the cash burn and to bring fiscal prudence to the operation of the company as Canopy looks to try and become profitable by the end of 2022.

Canopy Growth enters the US Hemp race

Source: New Frontier Data

In early 2019, CGC delighted investors with the news that it was going to invest between USD$100-$150 million to establish a hemp industrial park just outside of New York City.

The market liked this move and the Canopy Growth stock price really climbed. This was one of the few times that Canopy has demonstrated slow, methodical, well thought out, growth. No rash and overvalued purchases.

What's been happening in Canopy Growth's business?

CGC is always on the front foot, announcing deals and updates that are usually firsts for the industry. Here are some of its latest releases regarding celebrity endorsements, and various global expansions.

Canadian Music Icon Drake Launches Cannabis Wellness Company with Canopy Growth – Canopy Growth Corporation and Drake announce they've entered into agreements to launch the More Life Growth Company, a fully licensed producer of cannabis.

Spectrum Therapeutics Partners With Tree of Knowledge To Provide Educational Services – Spectrum Therapeutics, the medical division of Canopy Growth recently announced its partnership with Tree of Knowledge (CSE:TOKI) to provide education and support for patients and their healthcare professionals.

On the Podium – Canopy Growth Purchases Majority Stake In Sports Nutrition Company – Canopy Growth announced that it had completed an all-cash transaction to purchase a majority stake in BioSteel Sports Nutrition, a leading producer of sports nutrition products.

Licensed To Extract – Canopy Growth Receives Crucial Extraction License – Canopy Growth received a license from Health Canada for its KeyLeaf Life Sciences facility in Saskatoon, Saskatchewan, allowing the company to operate three significant extraction assets to support large scale value-add product development.

Constellation Brands moves its CFO – David Klein – across to Canopy Groweth to take the reigns as the new CEO. Klein has served in a number of leadership positions and capacities over the years, with particular focus on, and experience in, company finance, operations, and mergers and acquisitions.

So why did Canopy Growth stock drop?

Canopy Growth got the biggest investment in the history of the cannabis industry when Constellations Brands invested CAD$5 billion into the company. However, since then they have burned through nearly CAD$2 billion of that with multiple acquisitions that have made the company "Frankenstein" in makeup.

In addition, the firing of its rockstar founder, Bruce Linton, shook the industry to its core, and with a leaderless ship, many investors moved to the sidelines awaiting the next development.

And finally, the overall industry growth has been nowhere near what analysts had predicted. This has directly resulted in reported revenue from the Canadian Licensed Producers all missing the analyst's targets. Canopy Growth was no exception, with a poor last quarter that put pressure on the CGC stock price.

Disclaimer: Past performance is not an indicator of future performance.

Disclaimer: Past performance is not an indicator of future performance

Q1 2020…and the CGC Stock price falls 11%

On the 14th August, Canopy Growth released their earnings report for the first quarter of their fiscal 2020. The company reported a sequential decline in revenue, a $1.3 billion loss, and a marginal improvement in adjusted EBITDA. Bottom line, not good at all.

Canopy Growth Cannabis revenue
Source: Company Filings

Canopy Growth's net revenue also declined 4% QoQ to $90 million. Not only is this a decline when almost everyone else is showing an increase, but it is now behind Aurora's $100-107 million guidance. If you remove the revenue of the recently acquired C3 in Germany, then the decline of 13% QoQ becomes even worse.

The decline in revenue is glaringly obvious. Canopy Growth clearly misunderstood the level of demand in the Canadian recreational cannabis market. Basically, they banked on high demand for recreational oils and capsules. But these were low potency oils and capsules, and the market never took to them at all. As a result, Canopy is taking an $8 million hit and expects a significant amount of their previously-sold product to be returned, unsold.

Canopy Growth Recreational Cannabis for Q1 2020
Source: Company Filings

Previously, Canopy Growth had quickly established themselves as the recreational market leader in Canada. However, sales in this current quarter were flattered by higher pricing on the medical cannabis side of the business, whereas its recreational sales came in at $6.35 per gram, nearly a dollar lower than just one quarter ago.

Canopy Growth came into the quarter with the worst margin of any of the Canadian LP's and left in even worse shape. This quarter's margin dropped to an all-time low of 15%. To put this in perspective, most of the major producers are above 50%, with only Tilray's margin being comparable, but then they both buy and sell cannabis at wholesale.

Canopy Growth Gross Margins
Source: Company Filings

One big win from the quarter was their harvest. Canopy Growth recorded its largest-ever cannabis harvest in the June quarter. Nearly 41,000kg harvested, up 323% from the 9,685kg harvested one year earlier. The good news for investors is that over 70% of this harvest was graded as "high THC" strains, which sell very well. 

While this was a huge decline in sales, it also came with a massive increase in premium inventory, which means the company should have significant future revenue potential. Investors could expect higher sales in the coming quarters, which could well drive the CGC stock price.

Operating costs for the quarter declined 6% QoQ to $229 million. Although we applaud the decline, make no mistake about it, it's still way higher than the revenue, meaning profitability is still a way off.

Canopy Growth Operational Loss Q1 2020
Source: Company Q1 FY20 Financial Statement.

Canopy Growth loses $1.2b in the quarter!?!

Canopy Growth's income statement contains a $1.176 billion charge for "loss on extinguishment of warrants."

Essentially, when Constellation Brands invested $5 billion into Canopy last August, part of the deal was that Constellation was given warrants, allowing them to purchase up to 55% of the business for an additional $5 billion. But, when Canopy made the decision to acquire Acreage in April this year, the all-stock deal would have led to dilution for Constellation, and thus their warrants needed to be renegotiated.

Bottom line, Canopy Growth has agreed to use about one-third of the proceeds from Constellation's warrants for a share buyback. It is an accounting fix and no money will ever actually be paid. This non-operating loss led to Canopy's $123 million operating loss, which would eventually become a $1.3 billion net loss. Despite this—and the cash payments to acquire C3 and Acreage Holdings—Canopy still has $3.1 billion in cash on hand.

Canopy Growth gives guidance for 2020

On its latest earnings call, the Canopy Growth CFO gave the following guidance

  • Revenue – C$250 million ($189 million) per quarter
  • Gross margins – 40%
  • EBITDA profits in Canada FY21
  • EBITDA profits company-wide FY22

With only CAD$90 million in the prior quarter in revenue, Canopy Growth is going to have to increase their revenue by over 150% in the coming three quarters in order to meet this target.

With one of the lowest margins in the industry, the company is going to have to create serious operating leverage if it is to achieve the gross margin target.

The primary factor that will drive this growth, according to the CGC, will be the increase of brick and mortar stores across Canada. With 30% store growth projected by March 2020, this will really drive industry growth, and Canopy Growth is very well placed to increase its market share.

So how much is Canopy Growth stock really worth?

Over the past two years, the Canopy Growth stock has fluctuated wildly. The company is often considered the benchmark for the industry. Being one of the largest and most capitalised, Canopy Growth has always commanded a very large premium compared to many of its industry peers.  Essentially you could take the cash in the bank – currently sitting at around CAD$3 billion – and apply a 1x value to it. 

Canopy Growth revealed that, despite posting strong sales and volume growth in the first quarter of its new fiscal year, it's still been unable to generate a profit. In fact, following Aurora's guidance of their upcoming results, Canopy has finally been knocked off the #1 ranking. It was never going to be a great quarter. Bruce Linton is no ordinary CEO, and for Constellation to fire himwith little to no warningalways meant that the next couple of quarters were going to be, well, harsh.

At the time of writing, the CGC stock has an enterprise value of around CAD$8.6 billion. With sales in the last quarter of CAD$90 million, Canopy Growth stock currently trades at 24x annualised value.

Canadian LP Ev/Sales Ranking

Canopy Growth needs to address the burn, and do it immediately. They have more than enough cash in the bank and are dominant in many areas of many markets. But falling revenue, industry-low margins, and global growth are all burning cash in staggering amounts, and Canopy needs to tighten the ship and start looking to drive operating leverage if it's ever going to turn a profit. And apparently—according to some—profit is making a comeback.

Is Canopy Growth a good stock to buy?

The entire cannabis industry has been in significant decline for the past 7 months (at time of writing). This has put tremendous pressure on all stock prices, with Canopy Growth stock price being no exception.  However, almost all companies have now reached oversold territory, and it is a matter of time before these beaten-up stocks start to come back into favour.

Disclaimer: Past performance is not an indicator of future performance.

Disclaimer: Past performance is not an indicator of future performance

Canopy Growth has always been the market leader, and a barometer, for the entire industry. We believe there is significant upside to the Canopy Growth stock price at these levels, which represent a great opportunity for investors looking to initiate a position, or for existing holders to dollar average down.

The company is especially well-capitalised thanks to the Constellation Brands investment. With a war chest of just over CAD$3 billion, the company will not have to raise capital anytime soon and therefore there will be no overhand on the CGC stock price.

But there are most certainly good things to come. Acreage talking about Tweed in the US, Canadian edibles and extracts around the corner, and a new super-CEO (one would think) on the horizon, all lead us to believe that this will be a short term blip on the radar for the Canopy Growth stock price.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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