It’s like watching the former coolest guy fall from grace. It’s a difficult time for the Canadian weed industry. And industry giant Canopy Growth exemplifies the situation well; first getting booted off the S&P TSX, and now with a $0 price target by analyst review. What’s the next move?
First Canopy was booted from S&P TSX
Canopy Growth had a fantastic few years, but that was a few years ago. Now, the company is in the news every other day; and its not for growth and expansion, but move after move of decline. Last month, the S&P Dow Jones reported on June 2nd, that by the time the exchange opened on June 19th, Canopy would no longer be listed on the S&P/TSX Composite Index. This index is Canadian, and represents approximately 70% of total market capitalization for the Toronto Stock Exchange, Canada’s biggest stock market. The S&P TSX is the equivalent of the S&P 500 in the United States.
It happened because Canopy, which enjoyed stock prices of CAD $55 (USD $41) in February of 2021; went down to CAD $1.14 in June. Whereas in February of 2021 it had a CAD $25 billion valuation, at the time of getting kicked off the exchange, it was down to CAD $600 million. Canopy no longer met the requirements of participation on the exchange, which necessitates a certain liquidity amount above .125%; market capitalization at minimum .04% of the index; and share price not below $1. By June 7th, Canopy’s stock price was down to $.72, and on July 10th, a measly $.47.
Canopy isn’t the only publicly traded cannabis corporation to get booted off an index recently, or warned that it could happen. On March 24th, fellow Canadian company Aurora Cannabis was warned by Nasdaq. This is different in that the company was given a six month period to work on itself and get back into requirements. Aurora has until September 20th, to close for 10 consecutive days above $1 in order to meet Nasdaq’s minimum bid price requirement. How it is doing? As of June 10th, its stock is at $.55.
Yet another Canadian operation, this time retail chain Fire & Flower Holdings, also got delisted from the TSX, as per MJBizdaily. Fire & Flower, which owns 90 dispensaries across the country, had filed for creditor protection prior to this happening. As of July 14th, the company will no longer be traded on the exchange due to not meeting requirements.
A fourth, Organigram Holdings, a cultivar and manufacturing business, got a Nasdaq warning as well in February. Like Aurora, Organigram had fallen under the minimum bid price requirement for 30 days straight. In June, Organigram was farther away, with a stock price of $.4. On June 19th, the company announced plans to consolidate its shares at a rate of 4:1, to retain its listing with Nasdaq. On July 10th its stock was at $1:59.
New analyst price target for Canopy – $0
Canopy is up against some heavy business realities. And it’s quite possible that all the moves in the world, won’t work at this point. Canopy’s last spate of bad news came at the hands of analyst company Eight Capital (via MJBizDaily), which gave it a $0 price target. A price target is where a particular analyst sees the stock price going in the future.
Ty Collin, the Eight Capital analyst who made the report Last Puffs of the Roach, broke it down to three main points:
- Canopy’s cash runway is less than 12 months
- The company doesn’t have many (if any) financing avenues
- The company repeatedly experiences large losses, without a way to profitability
He explains, “We therefore apply an asset-based/breakup valuation for Canopy, where we find a net asset value of zero after accounting for the Company’s substantial debts. With the recent bankruptcy of leading cannabis retailer Fire & Flower and the distressed sale of Hexo to Tilray, we think investors should be awake to the fact that no Canadian cannabis company is too big to fail in this environment.”
The report goes on to make some other important points considering the current trajectory of the industry. It says that “absent drastic interventions and a speedy slashing of cash costs, which we deem improbable in view of Canopy’s track record,” that the company should be broke within a year. And it goes on to say that “Management’s plan of action (is) likely too little, too late.”
That last line is interesting. We are watching the industry flail around. How quickly action is taken, and what sort of action, can determine a company’s future. And though its easy to point at companies like Canopy and blame them for their own bad decisions-making; its good to remember that cannabis companies are bound by expensive and restrictive government regulation, including heavy tax burdens. And that these regulations maintain in pretty much every cannabis market, even as they’re constantly pointed to, as the main source of overall industry problems.
By the time a company gets to the point that Canopy has, where analyst companies can’t give a target price; it means a company has lost a lot of trust in the industry. Not many people want to invest in something failing, that professional analysts can’t see anything good happening for. So such a review shows us where we are, and also acts as yet another nail in the Canopy coffin.
Canopy and recent losses
The $0 price target for Canopy comes within weeks of the company posting its losses for the previous fiscal year, which ended on March 31. According to the company, it suffered CAD $3.3 billion in losses. The company stated its own fear for its ability to keep going, saying this topic is a “going concern” at the company. The year prior, the company reported losses of $330.6 million, making for a major jump down between the two years.
As per a filing with the U.S. Securities and Exchange Commission, “Management has raised substantial doubt as to the company’s ability to continue as a going concern due to certain material debt obligations coming due in the short term. If we are unable to obtain additional capital, our financial results, financial condition and our ability to continue as a going concern will be adversely affected and we may have to delay or terminate some or all of our business development or commercialization plans or cease certain of our operations.”
As of late March, Canopy had 1,621 employees, down nearly 50% from a year before. While Canopy failed to stabilize sales for the year, the company also blames its losses on asset impairment and restructuring costs, and non-cash fair value changes. Sales for its adult-use market fell 36% year-over-year, totaling CA$131.2 million for 2023.
Medical sales overall apparently went up 6% over 2022, totaling CA$55.8 million. Just Canadian medical sales fell 27% from last year, its international sales fell 51%, This Works went down 19.4%, and Storz & Bickel went down 24%. Its Biosteel sports nutrition products company did increase 101%.
For its fourth fiscal quarter of 2023, Canopy earned net revenue of CA$88 million, which was 14% under what it earned in that quarter last year. From January-March, the last quarter, Canopy posted CA$648 million in net losses. According to the company, this had mainly to do with impaired assets and overall restructuring.
At this point, betting on Canopy sure isn’t a sure bet. But regardless, the company is found on the Toronto Stock Exchange, trading under WEED; and on Nasdaq, trading under CGC. As stated earlier, it is no longer on the S&P/TSX. Go for it at your own risk.
Conclusion
Where does Canopy growth go from here, now that analysts are giving the company a $0 price target? Either it finds itself a hail Mary pass, or it’ll be one of the first dinosaurs of the weed industry, to tank out and die.
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