Why Canopy Growth Stock Has Been in the Weeds

As of November 25, Canopy Growth (WEED)(CGC) was trading at 24.50 Canadian dollars. Since reporting its second-quarter earnings for fiscal 2020 on November 14, the stock has increased 0.2%. Canopy’s lower-than-expected second-quarter sales—and weakness in the cannabis sector—have dragged the stock down.

However, an upgrade from Bank of America and investor excitement over the House Judiciary Committee clearing legislation to legalize cannabis at the federal level appear to have offset the declines in the stock price. Let’s take a look at the company’s valuation multiples and how they compare against its peers. For our analysis, we use the forward EV-to-sales multiple and forward EV-to-EBITDA multiple.

Why Canopy Growth Stock Has Been in the Weeds

Canopy Growth’s forward EV-to-sales multiple

As of November 25, Canopy Growth was trading at a forward EV-to-sales multiple of 8.90x, compared to 6.50x before its second-quarter earnings. Analysts lowering their sales estimates for the next four quarters appears to have increased the valuation multiple. Weak second-quarter sales and near-term challenges in the cannabis sector in terms of pricing pressure and lower demand for cannabis also seem to have prompted analysts to lower their sales estimates.

Before Canopy reported its second-quarter earnings, analysts’ revenue estimate stood at 989.1 million Canadian dollars for the next four quarters. However, Wall Street lowered its revenue estimates to 750.6 million Canadian dollars as of November 25. Despite the increase, Canopy is still trading below its average historical valuation multiple of 14.87x since the beginning of 2017.

From the above graph, you can see Canopy is trading above its peers’ median value of 3.20x as of Monday. On the same day, peers Aurora Cannabis (ACB), Aphria (APHA), and Cronos Group (CRON) were trading at a forward EV-to-sales multiple of 5.51x, 1.96x, and 7.69x, respectively.

Why Canopy Growth Stock Has Been in the Weeds

Canopy Growth’s forward EV-to-EBITDA multiple

As of November 25, Canopy Growth was trading at an EV-to-EBITDA multiple of -31.8x, compared to -64.89x on November 13. Also, the company was trading significantly lower than its historical average of 71.93x since the beginning of 2017.

Before Canopy Growth reported its second-quarter earnings, analysts expected it to report a negative adjusted EBITDA of 99.02 million Canadian dollars in the next four quarters. However, they lowered their EBITDA estimates to -210.27 million Canadian dollars as of yesterday. Higher-than-expected operating losses in the second quarter could have prompted analysts to lower their EBITDA estimates.

From the graph above, you can see that Canopy traded lower than peers’ median value of 6.29x as of Monday. Meanwhile, peers Aurora Cannabis, Aphria, and Cronos Group were trading at a forward EV-to-EBITDA multiple of 56.37x, 11.79x, and -23.97x, on the same day, respectively.

Year-to-date sector performance

This year, the cannabis sector has underperformed the broader equity markets. The cannabis ETF, the ETFMG Alternative Harvest ETF (MJ), has fallen 30.7% year-to-date, as of November 25. Meanwhile, the S&P 500 Index rose 25%.

Higher-than-expected operating expenses, the expectation for a slowdown in cannabis sales, and a thriving black market appear to caused the cannabis sector to underperform. Individually, Canopy Growth has lost 33.1% of its stock value this year. Meanwhile, its peers Aurora, Aphria, and Cronos Group have fallen 50.9%, 22.3%, and 36.2%, respectively.

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