Photo: Courtesy of Chris Liverani on Unsplash

After Canopy Growth Corporation (CGC) revealed that its cannabis sales of CA$136 million ($108 million) did not reach a consensus of CA$151 million in the first three months of fiscal 2022, Cantor Fitzgerald's Pablo Zuanic placed a 12-month price target of CA$30.5 ($24.3) against a price of CA$18.9 in August.

At that time, the analyst was concerned about the "the lack of profit margin and cash flow improvement" the company's earnings report revealed.

Mike Lee, Canopy's CFO, said then that they were "continuing to drive cost savings and operational efficiencies across the company, and remain broadly on track to our target of $150-$200 million in fiscal 2022- fiscal 2023."

The Analyst

In his most note, issued on Monday, Zuanic acknowledged that Canopy "has made significant strides" under the helm of CEO David Klein, highlighting that management is calling for significant sales ramp-up in fiscal 2H22."

Still, the analyst kept a Neutral rating on Canopy Growth's stock but reduced its price target to CA$21 from CA$30.50 due to reduced estimates and sectoral derating.

The Thesis

Zuanic expects that the company's September quarterly sales will fall to CA$135 million, with "gross margins only start to improve by fiscal 2H22."

Moreover, achieving positive EBITDA is something Zuanic doesn't expect to happen before the first quarter of fiscal 2024, as opposed to the company's guidance that projects reaching that goal by the end of fiscal 2022 (March 2022).

The analyst noted that, in his opinion, in the second quarter of 2022, the benefits of booking a full quarter of the recently acquired Supreme Cannabis business "will be offset by low teens decline in the base domestic cannabis business."

Canopy bought Supreme Cannabis' issued and outstanding common shares for about CA$435 million ($345.7 million) in June.

The deal bolstered Canopy's "leadership position by offering Canadian consumers a differentiated brand portfolio – including the addition of 7ACRES, which further bolsters our premium product segment," Klein said at the time.

With the company's share down 36% in the last three months, Zuanic doesn't see the stock outperforming, taking into account "increased concerns that the company's strategic pivot in Canada (away from value flower) may take as long as it has taken at Aurora."

To wrap up its latest note, Zuanic said that he prefers Tilray Inc. (TLRY) over Canopy for those who want exposure to the larger Canadian LPs.

"On our math and estimates, the WEED.TO cannabis stub trades at 15x CY22 sales compared with 11x for TLRY's cannabis stub, despite Canopy Growth's smaller rec scale vs. TLRY and below-par momentum," Zuanic said. "We realize the stock's premium is partly due to the B/S, STZ (NC) back-up, and a more advanced US ecosystem vs. peers."

Price Action

Canopy Growth's shares traded 4.69% lower at 4.83% at $14 per share at the time of writing Monday morning.