Are Shares of Canopy Growth (CGC) a Buy at These Levels?

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October 3, 2019 10:29am ETF BASIC NEWS

ETF BASIC NEWS | News, Ratings, and Charts

In recent months, Canopy Growth Corp (CGC) has received mixed forecasts from Wall Street analysts, with many of them taking note of the company’s acquisition sprees.

Today, CGC announced yet another all-cash deal for a majority stake in the CBD sports nutrition company, BioSteel Sports Nutrition Inc.

“This acquisition allows us to enter the sports nutrition space with a strong and growing brand as we continue towards a regulated market of food and beverage products that contain cannabis. We view the adoption of CBD in future BioSteel offerings as a potentially significant and disruptive growth driver for our business,” said Mark Zekulin, CEO of Canopy Growth Corp.

Canopy will own 72% of BioSteel (no terms were provided), with an agreed upon path to complete ownership. BioSteel brand ambassadors include NHL Hall of Famer Wayne Gretzky and current Dallas Cowboys star Ezekiel Elliott.

Analysts have mixed outlooks on CGC 

On Tuesday, Piper Jaffray analyst Michael Lavery reiterated his Outperform rating for Canopy Growth and lowered his price target from $49 to $40.

Lavery anticipates that Canopy’s new management team will implement capital spending discipline, which should help the company become more self-sufficient as the cannabis industry matures.

“We continue to estimate a $250-500B potential long-term global cannabis market, with a $15-50B near-term opportunity, and believe Canopy is well positioned in the sector, particularly with US$2.3B in cash in an industry recently facing growing difficulty raising capital,” Lavery said.

The analyst noted that capital will probably become a key differentiator among marijuana stocks, given the vast amount of resources required to scale up operations.

Lavery added that he thinks Cronos (CRON) is the only other licensed producer that’s well-positioned enough to invest in growth without needing to raise capital.

The analyst also mentioned the while he thinks the recent spate of vaping-related illnesses and talk of regulatory crackdown may create some near-term headwinds for the cannabis industry, he expects that vaping will still become a long-term bullish catalyst.

Last week Bank of America analyst Christopher Carey lowered his price target for CGC stock, downgrading it from “buy” to “neutral,” citing temporary weakness in the Canadian market.  

Carey noted that that the majority of issues hindering CGC are beyond the company’s control, plaguing the cannabis space as a whole. He points out that there is a licensing bottleneck for Canadian cannabis retail outlets.  

As a result, Canadian consumers have been pushed back toward the black market, but that issue is expected to be resolved by the second half of 2019. Carey added that that there is currently a backlog of “3 and a half months of flower inventory in the channel in Canada and eight and a half months of oil.”

The analyst concludes that this is a result of lack of retail outlets versus lack of consumer demand.

MKM Partners Analyst Bill Kirk expects Canopy Growth Corp. to become profitable on an EBITDA basis by the Q1 of 2020, compared with the consensus forecast for EBITDA profitability by the Q1 of 2021.

“We think a looming weak reporting season will gradually push consensus expectations toward ours,” Kirk said.

Canopy Growth Corp. (CGC) was trading at $21.71 per share on Thursday morning, down $0.27 (-1.23%). Year-to-date, CGC has declined N/A%, versus a 7.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

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