Does Canopy Growth Still Have Room to Run?

The cannabis industry got great news today after learning that the U.S. House passed a measure to decriminalize marijuana at the federal level. While the bill is unlikely to pass in the Senate, it is a great step forward. This news was on the heels of the United Nations voting to remove cannabis from its list of dangerous drugs, and the general optimism surrounding Joe Biden’s win in the U.S. Presidential election.

The Presidential election has led to strong gains for cannabis stocks, but especially for Canopy Growth (CGC), whose stock has doubled in the past two months. While many cannabis companies took on high priced acquisitions that led to large amounts of goodwill and lessened shareholder value, CGC was able to avoid this and ink a deal with Constellation Brands (STZ). STZ has invested in CGC on four separate occasions and currently holds a 38.6% stake in the company.

This has given CGC a war chest of cash, enabling the company to survive the recent bear market in cannabis stocks. The second benefit to this collaboration is that STZ is highly inclined to support CGC’s business and provide access to their management expertise and beverage distribution network. CGC still has a strong cash balance of CA$1.72 billion as of the end of the quarter.

Since being appointed as CGC’s CEO in January, David Klien has done a fantastic job bringing SG&A costs down, as the company pushes towards profitability. Despite these efforts though, the company has still not been able to turn a profit, and investors may eventually get impatient if this does not happen soon. But the company is certainly improving. In the second quarter, the company increased its revenues by 77% year over year to CA$135.3 million. Gross margins also increased to 19%, and there was a 57% improvement in free cash flow.

The company holds the highest market share of any single cannabis company in Canada when it comes to beverages at 54%. CGC also increased its industry weight in the Canadian recreational market by 2%, to bring the number up to 15.5%.

Due to a newly favorable environment for the cannabis sector, Bank of America analysts Bryan Spillane and Lisa Lewandowski upgraded CGC this week. They raised their price target on Canopy from CA$30 ($27.06) to CA$42 ($32.37), while maintaining a “Buy” rating on the company. The analysts shared their view by stating, “We see mgmt. changes, right-sizing of operations and its enviable cash and share position as all reasons to believe that Canopy can be a LT leader in the cannabis sector."

In my opinion, I believe that investors may want to take a wait and see approach with CGC at this time. Though CGC looks promising in the long-term, the stock has doubled in a very short period of time and investors may have gotten ahead of themselves. Until we see a substantial jump in revenues, I will be watching from the sidelines. 

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CGC shares rose $0.39 (+1.36%) in after-hours trading Friday. Year-to-date, CGC has gained 35.56%, versus a 16.56% rise in the benchmark S&P 500 index during the same period.

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles.

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