Must-Know: Is Canopy Growth Still a Buy?

After reporting weak second-quarter earnings on November 14, Canopy Growth (NYSE:CGC) (TSE:WEED) stock fell to a low of 18.23 Canadian dollars on November 19. Since then, the company has recovered. As of Thursday, the company was trading at 31.67 Canadian dollars, which represents a rise of 42.4% from the lows on November 19. The stock price likely rose due to the appointment of a new CEO, an update on its upcoming Cannabis 2.0 products, the launch of a new CBD brand in the US market, and positive commentary from analysts. So, after such a surge in its stock price, is Canopy Growth still a “buy?” Let’s look at analysts’ expectations.

Analysts’ revenue expectations for Canopy Growth

For fiscal 2020, analysts expect Canopy Growth to report revenues of 404.5 million Canadian dollars—a rise of 78.7% from 226.3 million Canadian dollars in fiscal 2019. They expect the company’s revenues to rise by 80% in fiscal 2021 to 728.4 million. We expect the growth in both medical and recreational cannabis sales and contributions from CBD product sales in the US to drive the company’s sales.

With the legalization of Cannabis 2.0 products, Canopy Growth is focusing on cannabis-infused beverages, edibles, and vapes. Last month, the company gave information on the derived products that it plans to launch in the next few months. To learn more, read A Look at Canopy Growth’s Cannabis 2.0 Portfolio. We expect these new launches and the initiatives taken by the Canadian provinces to expand the retail footprint and drive the company’s recreational revenues.

Focusing on expanding its international medical business, Canopy Growth launched an accredited physician education program in Australia. During the earnings call, the company announced that its Danish greenhouse received GMP certification and would serve European markets from the first quarter of fiscal 2021. These initiatives could drive the company’s medical cannabis sales.

Canopy’s CBD business

Canopy Growth has made significant investments in hemp cultivation in the US. The company also announced that its processing and research facility in Kirkwood, New York, is on track. Last month, the company introduced its first CBD brand First & Free Brand. Through the acquisition of BioSteel Sports Nutrition, the company plans to introduce CBD sports nutrition offerings in the US this year. The company has also expanded the distribution of BioSteel products to over 6,000 points. All of these initiatives could drive the company’s revenues.

Analysts’ EBITDA expectations

Analysts expect Canopy’s EBITDA losses to rise in fiscal 2020. They expect the company to report a negative EBITDA of 455.2 million Canadian dollars. The estimate represents an increase in loss of 77.1% from a negative EBITDA of 257.0 million Canadian dollars in fiscal 2019. However, for fiscal 2021, they expect the company to report a negative EBITDA of 224.3 million Canadian dollars. The estimate represents a YoY improvement of 50.7%.

We expect the pricing pressure due to demand-supply mismatch and the company’s increased investment in the development and distribution of Cannabis 2.0 products to lower the EBITDA in fiscal 2020. However, increased sales of higher-margin derived products could improve the company’s EBITDA in fiscal 2021.

Analysts’ recommendations for Canopy Growth

Recently, many analysts have talked positively about Canopy Growth. To learn more, read Canopy Growth Has Life, Say These Managers. Even Jim Cramer is optimistic about Canopy Growth. Overall, analysts favor a “hold” rating for Canopy Growth. Among the 23 analysts that cover the stock, 13 recommend a “hold” rating. Analysts’ consensus target price is 28.77 Canadian dollars, which represents a fall of 9.2% from its stock price of 31.67 Canadian dollars.

Our take on Canopy Growth

Canopy Growth plans to introduce a variety of Cannabis 2.0 products. The products have higher margins. So, the products drive the company’s revenue and increase profitability. The company still has a higher market share in Canadian provinces like Ontario, Alberta, and Québec. Moving to the CBD business, the restrictions on the marketing and distribution of CBD products due to non-approval by the FDA limited the CBD business’s growth. However, the situtation could change with Collin Peterson’s new legislation. Read Will the New CBD Bill Boost US Businesses? to learn more. In May 2019, BDS Analytics and Arcview Market Research projected that the US CBD market would exceed $20 billion by 2024. So, there’s considerable scope for Canopy Growth to expand its CBD business.

Although Canopy Growth stock has increased by 42.4% from the lows on November 19, it’s still trading 55.4% lower than its 52-week high of 70.98 Canadian dollars. So, with the considerable growth prospects and its new CEO David Klein expected to bring financial discipline, we expect Canopy Growth to have more upside.

YTD stock performance

After having a tough 2019, the cannabis sector has shown some improvements this year. The ETFMG Alternative Harvest ETF  lost 31.4% of its stock value last year. So far in 2020, the ETF has increased by 9.2% as of Thursday. During the same period, Canopy Growth has also delivered strong returns of 16%. Meanwhile, Cronos Group (NASDAQ:CRON) and HEXO (TSE:HEXO) have increased by 6.3% and 11.9%, respectively. Aurora Cannabis (NYSE:ACB) is trading flat.