Canada-based diversified cannabis and hemp company Canopy Growth (CGC) is set to report its fiscal 2020 second-quarter results on November 14. The results come at a time when the cannabis sector is mired in pessimism. Will the company’s impending results prove a game changer for it, or will they push its stock down further?
Analysts’ estimates for Canopy Growth’s earnings
Analysts expect Canopy Growth to report revenue of 112.86 million Canadian dollars in the second quarter of fiscal 2020, implying a YoY (year-over-year) rise of 383.79%. They also expect the company to report revenue of 547.16 million Canadian dollars in fiscal 2020, implying a YoY rise of 141.74%. These estimates, however, are a significant step down from analysts’ earlier sales projection of 1 billion Canadian dollars for fiscal 2020.
Analysts expect Canopy Growth to report adjusted EBITDA of -92.18 million Canadian dollars in the second quarter of fiscal 2020. This implies a YoY improvement of 54.14%. Analysts also expect the company to report adjusted EBITDA of -320.18 million Canadian dollars in fiscal 2020, a YoY deterioration of 24.60%.
Canopy Growth’s guidance
In its investor presentation, Canopy Growth guided for an annual revenue run rate of 1 billion Canadian dollars by the fourth quarter of fiscal 2020. The company expects a 40% gross margin by the fourth quarter.
Canopy also said it expects its Canadian operations to report positive quarterly adjusted EBITDA by the fourth quarter of fiscal 2021. This estimate excludes operating expenses associated with international markets. The company has also guided for its consolidated operations to report quarterly positive adjusted EBITDA by the fourth quarter of fiscal 2022. It expects positive net income in the next three to five years.
Why has CGC lowered estimates?
Canopy Growth’s recent guidance and analysts’ revised estimates reflect the current dynamic in the cannabis sector. HEXO Corporation’s (HEXO) pre-earnings announcement underscored industry pressures. A slower-than-expected retail rollout in Canada is exacerbating pricing pressures. Access to capital and environmental risks have further added to the sector’s woes. There also doesn’t seem to be a resolution to the problems associated with vaping. Black market activities are not only eating into the sales of regulated cannabis but also affecting its credibility.
What are prominent analysts recommending for CGC?
On October 22, as reported by The Fly, Piper Jaffray analyst Michael Lavery reconfirmed his confidence in Canopy Growth. The company’s 3.1 billion Canadian dollars in cash and cash equivalents stands out in times of constrained capital. Lavery is also impressed by the visibility of the company’s strategic priorities. However, he’s reduced the company’s target price from $40 to $36.
Lavery also favors Cronos Group (CRON) but maintains a “neutral” rating on Aurora Cannabis (ACB). He’s reduced ACB’s target price from $7 to $4 and CRON’s from $18 to $12. He’s also cut Tilray’s target price from $72 to $31, but he maintains an “overweight” rating on the stock.
On October 16, BofA Merrill Lynch analyst Christopher Carey reduced Canopy Growth’s target price from $27 to $23. He maintains a “neutral” rating on the stock.
On October 14, Seaport Global analyst Brett Hundley reduced Canopy’s fiscal 2021 revenue estimate to $475.5 million and its fiscal 2021 EBITDA estimate to -$75.1 million. The analyst is also skeptical about the company receiving incremental funding from Constellation Brands. Based on these factors, Hundley has downgraded the stock from “buy” to “neutral.”