GMP Downgrades Canopy Growth After Mixed Q3

Canadian cannabis company Canopy Growth Corp (NYSE: CGC) reported third-quarter results last week that were highlighted by the first revenue beat in the past four quarters, but a gross margins of 22 percent was the worst seen in three years, according to GMP.

The Analyst

GMP Securities' Martin Landry downgraded Canopy Growth's Toronto-listed stock from Buy to Hold with a price target lowered from CA$70 ($52.87) to CA$65 ($49.09). 

The Thesis

Canopy Growth's Feb. 14 earnings report includes three near-term concerns that imply that a bullish stance on the stock can no longer be justified, Landry said in a Tuesday downgrade note:  

The company exited the quarter with $22 million of finished goods, which is notably lower than $56 million in the prior quarter, the analyst said. This could impact the company's ability to grow in the near-term and gives competitors an opportunity to "catch up" with superior inventory on hand and capacity expansion plans, he said.

Despite the cannabis sector's very young age, Canopy Growth has yet to fully explain its path toward profitability, Landry said. SG&A expenses have now exceeded revenue for each of the past three quarters, which calls into question the company's timeline for reaching positive EBITDA, he said. Canopy Growth could wind up being the last cannabis company to show positive EBITDA within GMP's entire coverage universe, the analyst said.

Finally, Canopy Growth's valuation factors in expectations for large revenue growth, but the company's sales remain small, Landry said. The company generated just $2.7 million in revenue last quarter, yet the stock is up 72 percent in 2019 alone and 12 percent in the past year, he said.

While this move higher may be justified given the company's leadership role in the global cannabis space, a "pause" is likely to be seen before the next move higher given multiple near-term concerns and challenges, according to GMP.

Price Action

Canopy Growth's NYSE-listed shares were down 2.78 percent at $46.21 at the time of publication Tuesday.

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