Canopy Growth Corporation (CGC) has been an underperformer over the past 12 months.
However, with the possibility of the federal legalization of cannabis in the United States, it seems that the worst is over for the stock. (See CGC stock charts on TipRanks)
Additionally, the company has undertaken some significant business growth initiatives, which are likely to deliver results in the coming quarters. I am bullish on Canopy Growth.
Mixed Results, Positive Outlook
For Q1 2022, Canopy Growth reported year-over-year revenue growth of 23% to $136 million. The company’s adjusted EBITDA loss also narrowed to $64 million, as compared to $93 million a year ago.
Furthermore, free cash flow loss was $186 million. While EBITDA level losses have narrowed, cash burn remains a worry for Canopy Growth. However, the company has guided for positive adjusted EBITDA by the end of 2022. If losses continue to narrow in the coming quarters, CGC stock is positioned for a sharp reversal.
One reason to believe that the company can deliver improved results is its product pipeline. In Q1 2022, Canopy launched more than 50 SKUs. Over the next few quarters, the company has lined up the launch of more than 100 additional SKUs.
A key point to note is that the focus is on value-added cannabis products. This includes beverages, gummies, and other edibles. If these SKUs can deliver incremental revenue growth, significant improvement in EBITDA margin seems likely.
Acquisition-Driven Growth
It’s worth noting that the cannabis industry is in a phase of consolidation. With cash and equivalents of $2.1 billion as of June 30, Canopy Growth seems well positioned to pursue opportunistic acquisitions.
In April, Canopy completed the acquisition of Ace Valley, a premium cannabis brand that complements Canopy’s existing portfolio. Besides cost synergies, the acquisition will help Canopy in further boosting its presence in Canada.
Canopy Growth also completed the acquisition of Supreme Cannabis in June. The acquisition will add premium brands 7ACRES, and 7ACRES Craft Collective to CGC’s portfolio.
Over the next two years, the acquisition is also likely to deliver cost synergies of $30 million.
Constellation Brands (STZ) currently holds a 38% ownership stake in Canopy Growth, giving the company strong financial backing.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CGC stock comes in as a Hold, with three Buys, nine Holds, and one Sell assigned in the past three months.
The average CGC price target is $26.13 per share, implying 76.7% upside potential from current levels.
Concluding Views
Grand View Research estimates that the global cannabis market size is likely to be worth $70.6 billion by 2028. The market is therefore still at an early growth stage.
Canopy Growth seems to be among the players that’s positioned to survive the cash burn, and grow in the coming years. Once cannabis is legalized at the federal level, Canopy’s top-line growth is likely to accelerate.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article
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