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Benchmark analysts on Monday reiterated their sell rating on Canopy Growth Corp. as it burns cash at a rate that’s more “intense than a midnight blaze” while TD Cowen sounded a more positive tone on improved gross margins at the Canadian cannabis company.
Benchmark analyst Mike Hickey said Canopy Growth Corp.’s
CGC,
WEED,
third-quarter results released Thursday revealed “severe cash flow deficits” and decreasing revenues in its Canadian cannabis business.
Its adjusted free cash flow deficit now amounts to 96% of revenue in a sign of “critical cost management issues,” Hickey said.
Moreover, Canopy Growth’s cannabis brands and product innovations “have been underwhelming” and its proposal to create a publicly-traded entity to reflect its U.S. businesses appears to be “driven by desperation,” he said.
Strict Canadian laws around cannabis and lack of federal legalization in the U.S. are adding to its challenges, he said.
Increasingly strict Canadian regulations and a fragmented U.S. regulatory landscape add to the challenges. Doubts about management’s effectiveness and credibility raise concerns about their ability to revive the business, Hickey said.
“WEED’s acknowledgment of operational risks further fuels worries about their sustainability and financial obligations,” Hickey said.
Meanwhile, TD Cowen analyst Vivien Azer reiterated a market perform rating on Canopy Growth Corp.
While the company’s sales forecast was 3% below TD Cowen’s estimate, its adjusted gross margin of 33% came in well above the firm’s estimate of 18%, she said.
The result reflects “notable improvements for Canadian cannabis” in addition to cost savings that remain on track, Azer said.
Azer said Canopy Growth said it remains on target for positive adjusted earnings before interest, taxes, depreciation and amortization by fiscal 2024.
Late Thursday, Canopy Growth Corp. reported a second-quarter loss of 31 cents a share, while analysts were looking for a loss of 11 cents a share, according to FactSet data.
Canopy Growth’s revenue of $50.6 million also missed the analyst estimate of $53.5 million.
On the plus side, Canopy Growth said its Canadian cannabis business booked its third straight quarter of organic revenue growth while “significantly” cutting costs.
Canopy Growth’s stock was up by 0.4% in premarket trading on Monday. The stock is down by 77.5% in 2023, compared to a 28.2% drop by the ETFMG Alternative Harvest ETF
MJ
and a 50.9% loss by the Global X Cannabis ETF
POTX.
Also read: Canopy Growth’s stock pops after it reveals latest plan to enter U.S. cannabis market
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