Canopy Growth Corp. (NYSE:CGC), the Canadian cannabis and CBD products company, seems to be experiencing a turnaround. It wasn’t that long ago that CGC stock was in the doldrums and its outlook was quite dark.
But now it looks like the company’s prospects are much brighter at least for the near term.
Moreover, in the past year CGC stock has risen over 34% as of Friday, Nov. 20. And year-to-date it is up 12.5%, most of which happened in the past month where it rose 25.6%.
This was likely from the positive news out of Canopy’s fiscal Q2 report for the quarter ending Sept. 30. In addition, the outlook for the future bodes quite well for CGC stock.
Sales and Cash Flow Turnaround
Canopy reported that revenue rose 77% to 135 million CAD. This was the highest sales level in the company’s history.
This was driven by a larger number of stores as well as a return to pre-Covid-19 levels of demand for cannabis products. In addition, Canopy gained market share over its competitors. Lastly, it started selling a good deal more cannabis and CBD products, not just its cannabis flower.
In addition, Canopy set up a partnership with Martha Stewart brands for CBD gummies and related products. It also signed distribution partnerships with beer companies, including Constellation Brands‘ (NYSE:STZ) distribution network.
This is important because the company already has a 54% dollar market share in Canada for ready-to-drink (RTD) THC-infused beverages. They also recently launched CBD-infused RTD beverages across Canada. Once these hit the US the company hopes to pick up significant market share as well.
Canopy is still burning cash but the burn rate now seems to be turning down with less cash outflow. For example, in the six months ending Sept. 30, Canopy lost CAD 280.3 million in cash flow from operations (CFFO). This was better than the prior year’s six-month period CFFO outflow of CAD 372 million.
Luckily, Canopy has enough cash to cover cash burn until it can get profitable. As of Sept. 30, it had CAD 1.72 billion in cash and securities. This was down from CAD 1.977 billion six months ago. This implies the use of CAD 257 million in the past six months from operations.
Therefore at that pace, the company could last 6 six-month periods (3 years) before it nearly completely used all its cash and securities. That should be plenty of time for the company to turn cash-flow positive.
What’s Next With CGC Stock
Part of the reason that CGC stock has been rising is the idea that a new Biden Administration might be more open to legalizing cannabis and related products. In addition, it is possible that they will allow banks to begin processing cannabis-related and CBD goods and services.
But more importantly, the prospect of Covid-19 restrictions being lifted, with new vaccines close to getting approved, is a catalyst inspiring people to buy more cannabis. They are bidding up cannabis stocks like CGC under the theory that people will be buying more cannabis products.
Some analysts are not so sanguine about CGC stock’s prospects. For example, TipRanks.com reports that of 10 analysts that cover the stock in the past three months the average price target is $21.19.
That represents a drop of 10.7% from today’s price of $23.72 (as of Nov. 20). However, the range is between a low of $16.80 and a high of $26.73. Seven out of the 10 analysts have a Hold, and 2 have a BUY recommendation.
However, Marketbeat.com reports that 18 analysts have an average target price of $29.59 for CGC stock. That represents a potential upside of almost 25% from today’s price.
Even though the Wall Street community is somewhat mixed on the prospects for CGC stock, I would argue that once there is light at the end of the tunnel, they will turn around. That light will be the prospect of the company producing free cash flow sometime in the next year or so.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.