Canadian pot producer Canopy Growth (CGC) has a market value above $9 billion, helped by a huge investment from Corona parent Constellation Brands (STZ) and control over a big chunk of Canada’s recreational weed market. It has struck up partnerships with celebrities and found new ways to enter the U.S. market. But after the departure of CEO Bruce Linton, who helped engineer many of those gains, is Canopy Growth stock a buy right now?
Canopy Growth Fundamental Analysis: Still No Profits
Canaccord analyst Matt Bottomley said in a report last month that Canopy Growth had “by far the #1 position in the Canadian market.” Some analysts this year have estimated that its recreational market share stands at around 30%. Stifel analyst W. Andrew Carter in June called Canopy Growth stock “the best investable opportunity” in the industry, saying the pot company was ahead of rivals in building out infrastructure to serve Canada’s legal market.
Still, the stock’s EPS Rating, which measures profit growth on a scale of 1 to 99, is a weak 21. Like other big marijuana producers, Canopy is losing money as it invests in domestic and international expansion. Earnings growth is a hallmark of top stocks.
Canopy Growth believes the payoff from those investments will make up for those losses. And analysts see Canopy Growth’s per-share losses shrinking from $2.02 in fiscal 2019 to 53 cents in 2020 and just 2 cents in 2021.
But investors haven’t always been so patient. CGC stock tumbled in June after Canopy reported a per-share loss in fiscal Q4 of 98 cents Canadian, far bigger than analysts expected. Margins during the period shrank from the prior quarter, hit in part by operating costs partly related to “facilities not yet cultivating or facilities that had underutilized capacity.”
But what Canopy lacks in earnings it makes up for in sales growth — another key component to strong stocks. Year over year, Canopy’s fiscal Q4 sales jumped 313%. Sales rose 13% from the prior quarter. However, sales of recreational cannabis dipped.
Not long after, in early July, Canopy announced that Linton was stepping down. Linton, however, told CNBC he was fired. Mark Zekulin will replace him. Zekulin and the company will begin the search for new leadership, Canopy said in a statement in July.
“Creating Canopy Growth began with an abandoned chocolate factory and a vision,” Linton said in a statement announcing his departure. “The Board decided today, and I agreed, my turn is over.”
Constellation Brands ‘Not Pleased’
After Linton’s departure, a Constellation spokesperson said in a statement in July: “We fully support the decision made by Canopy Growth’s Board of Directors to appoint Mark Zekulin as the company’s sole CEO. Mark has played an integral role in the company’s success since its inception, including managing all aspects of the company’s day-to-day operations.”
Constellation Brands, just days earlier, said it was “not pleased” with the quarterly results Canopy Growth reported in June. But the beverage company said it was still happy with its investment, and continued to “aggressively support” Canopy in its efforts to expand and achieve profitability.
Constellation Brands said it still believes Canopy Growth can hit a $1 billion sales run rate by the end of next fiscal year, assuming the business environment remains where it is now.
In 2017, Constellation Brands said it would take a nearly 10% stake in Canopy Growth, with plans to focus on cannabis-infused beverages. Constellation a year later expanded that stake to nearly 40%, and said it would support the “full suite” of Canopy’s products. The investment also installed executives and board members from Constellation on Canopy’s board of directors.
But as Canada’s legal weed market stumbles, analysts have raised more questions about Constellation’s investment. They’ve wondered whether Constellation Brands bet too early and too aggressively in a new, competitive industry. They also raised doubts about how popular cannabis beverages will be once legal.
Canopy Growth isn’t alone in disappointing investors as Canada’s legal weed industry deals with shortages and licensing delays, and tries to grow enough pot to match supply with demand. Shares of rival Hexo (HEXO) fell when the company reported in June a decline in sales quarter over quarter. Aphria (APHA) also took a hit after it reported earnings in April.
