Canopy Growth Corp (NAS: CGC)
Last Price: USD 4.88| Fair Value: USD 16.00
Business Strategy & Outlook
Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 50% of sales. Non-THC product sales account for about 30%. Canadian recreational accounts for roughly 60% of cannabis sales. Although the medical market to shrink as consumers turn to the recreational market, and more than 10% average annual growth for the entire Canadian market through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers.
Canopy also exports medical cannabis globally. The global market looks lucrative, given higher prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor— the single largest cost. However, many Canadian companies have pulled back expansion plans given ongoing cash burn. As per forecast around 15% average annual growth through 2030.
Canopy has a standing deal to acquire Acreage Holdings, a U.S. multistate operator, immediately upon federal legalization. The Canopy paid a good price and acquired an attractive option for an accelerated entry into the U.S. Canopy also owns 27% of U.S. multistate operator Terraced on a fully diluted basis. These U.S. assets look far more attractive than the continued challenges in the Canadian market. The U.S. market is murky, with some states legalizing recreational or medical cannabis while it remains illegal federally. The federal law will be changed to recognize states’ choices on legality within their borders, which would trigger Canopy’s deals. Based on state-by-state analysis, the nearly 20% average annual growth for the U.S. recreational market and nearly 10% for the medical market through 2030. Constellation Brands owns 38.6% of Canopy with additional securities that could push ownership to 55.8%. The investment as supportive of developing branded cannabis consumer products while also providing a funding backstop and foothold into the U.S. non-THC market.
Financial Strengths
On one hand, Canopy Growth’s debt remains relatively low. At the end of the fourth quarter of fiscal 2022, the company had about CAD 1.5 billion of debt compared with a market capitalization of roughly CAD 2.5 billion. On the other hand, the company continues to burn cash, which pressures its financial health. However, management has been focused on reducing capital spending and rightsizing its overhead, minimizing the need for further outside capital. The company will generate positive adjusted EBITDA in fiscal 2025 and positive free cash flow in fiscal 2026. The company’s target of positive adjusted EBITDA in fiscal 2024 looks possible in the latter half of the year, but no one had anticipate losses for the sum of the year. In the latter 10-year forecast, we think the company will generate enough positive free cash flow to reduce its debt. Benefiting its financial health, Canopy has generally relied on equity to fund acquisitions and expansion. The company’s first major debt raise occurred as recently as its first quarter of fiscal 2019. The company will continue to rely on equity to fund capital needs, which is typical for growth companies such as Canopy to help alleviate potential pressure on its financial health. Constellation Brands as a major strategic investor also adds a stabilizing presence to Canopy’s financial health.
Bulls Say
Company Description
Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and Craft Grow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization.
(Source: Morningstar)
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