Will Shares of Canopy Growth (CGC) Sink or Swim?

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September 11, 2019 11:43am NYSE:MJ

NYSE:MJ | News, Ratings, and Charts

From Eric Bowler

A lot of mixed news has been swirling around Canopy Growth Corp. (CGC) lately, so it’s worth taking a deeper dive to see how well this stock can stay afloat. 

Starting with the elephant in the room, many investors still seem shaken by the void in leadership left behind former CEO Bruce Linton’s wake. However, interim CEO Mark Zekulin seems confident that they’ll have Linton’s replacement within “a matter of months.”

“But it’s not about Bruce, it’s not about Mark and as excited as we are about the next CEO, it’s not even about that person, right?” Zelulin said. 

“It is about the fact that we built a company of 4,000 people who all believe in a culture, a mission, that there is a multi-hundred-billion-dollar opportunity to seize. And that commitment, that team, that structure existed yesterday, it exists today, and will exist tomorrow.”

Following the steep downhill trend that plagued cannabis stocks throughout the summer, CGC stock seems to finally be regaining some footing as its value spiked up approximately 15% in recent weeks.  

Will Rec. 2.0 be the game changer? 

Many investors are looking to Rec 2.0 to be a game changer in the Canadian market. Rec 2.0 is the informal name for when the Canadian government legalizes the sale of new cannabis product lines (such as edibles) later this year. Amongst its Canadian peers, Canopy Growth is poised to capitalize on this, with plans to launch edibles, beverages and vape products. 

Canopy Growth also has jumbo size working in its favor. With 5 million square feet in licensed capacity across multiple countries, CGC has already set itself up to be a dominant player in the global market. 

Nonetheless, expansion has not been cheap and losses have been piling up regardless of the company’s 249% increase in revenue year on year. This pace of supply expansion increases a higher loss per share, as revenue continues to lag behind costs.

Many investors are confident that Canopy will eventually achieve economies of scale as it expands in multiple countries. But in order to get there, the company must also balance supply levels with the actual demand that comes with product legalization.

Canopy Growth also touts the ambitious goal of achieving a $1 billion run rate by the fourth quarter with a 40% margin. Even if Canadian demand isn’t quite there yet, CGC seems certain that it will be soon. 

Currently, there are approximately 460-600 cannabis retail stores open throughout Canada, however it’s expected that Canada will see another 1,500 more stores open throughout the next few years, which CGC is banking on. Not only that, it’s important to keep in mind that Canopy’s aggressive rate run target is aimed at a global market, not just the Canadian one.  

Nonetheless, Canopy’s strategy to build inventory first and optimize output, has hurt short-term results. The gross margins of 15-22% fell short of the target, but are primarily attributed to retrofitting activities that hurt yield. The company claims these issues have been resolved, and anticipates getting back to the 40% margin rate by Q4/2020.

Also, keep in mind that CGC is still sitting on approximately $3 billion left from the Constellation (STZ) investment (and that Constellation has majority control). The company’s war chest will most likely be used to cover expenses related to integrating Acreage and C3 (a division of Bionorica). 

CGC has already spent hundreds of millions developing its bottling facility and advanced manufacturing building in Canada.

Canopy Growth Corp. (CGC) was trading at $27.65 per share on Wednesday morning, up $0.22 (+0.80%). Year-to-date, CGC has declined N/A%, versus a 12.55% rise in the benchmark S&P 500 index during the same period.

This article is brought to you courtesy of ETFDailyNews.com.

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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