Smith Falls, Canada-based diversified cannabis company Canopy Growth Corporation (CGC) has made consistent product developments. In November 2021, it unveiled a new lineup of premium flower offerings across its 7ACRES, 7ACRES Craft Collective, and DOJA brands. That month it also announced two new product offerings from its Deep Space brand and Deep Space XPRESS. However, the stock declined 60.5% in price over the past six months and 8.5% over the past month to close yesterday’s trading session at $8.75.

CGC said on Nov. 5, 2021, that its revenue is expected to accelerate in the second half of its fiscal 2022, but that the “magnitude and pace of improvement is expected to be more modest than previously anticipated.” It postponed meeting its positive adjusted EBITDA target due to market share challenges in the Canadian recreational business and a slower-than-expected ramp-up of U.S. distribution for BioSteel. 

Furthermore, Piper Sandler analyst Michael Lavery has downgraded the stock’s rating to ‘Underweight’ from ‘Neutral’ and lowered the price target to $7 from $11. So, its near-term prospects look bleak.

Here is what could shape CGC’s performance in the near term:

Divestiture of C3

On Dec. 15, 2021, CGC announced that it had agreed to divest its subsidiary business, C3 Cannabinoid Compound Company GmbH, to German-based Dermapharm Holding SE. The move is designed to continue CGC’s evolution into a CPG-modelled organization. However, this could hurt its revenue.

Unimpressive Financials

CGC’s net revenue decreased 2.9% year-over-year to CAD131.37 million ($103.78 million) for its fiscal second quarter, ended Sept. 30, 2021. The company’s revenue from the Canadian recreational cannabis segment was C$58.58 million ($46.28 million), down 11% year-over-year. In comparison, its revenue from the dry bud segment declined 7% year-over-year to CAD9.12 million ($7.20 million).

Its gross profit margin came in at a negative CAD71.14 million ($56.20 million) compared to CAD26.08 million ($20.60 million) in the prior-year period. Its net loss was CAD16.33 million ($12.90 million) compared to CAD96.55 million ($76.28 million) in the year-ago period. Also, its loss per share was CAD0.03 compared to CAD0.09 in the prior-year quarter.

Poor Profitability

In terms of trailing-12-month gross profit margin, CGC’s 0.93% is 98.3% lower than the 55.41% industry average. And the stock’s 0.09% trailing-12-month asset turnover ratio is 75% lower than the 0.35% industry average. Also, its negative trailing-12-month EBIT margin and EBITDA margin compare to the industry averages of 2.40% and 5.96%, respectively.

POWR Ratings Reflect Bleak Prospects

CGC has an overall F rating, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. CGC has a D grade for Stability, which is consistent with its 1.93 beta.

The stock has a D grade for Value, which is in sync with its forward EV/S and P/S of 7.02x and 7.47x, respectively, which are higher than the 5.50x and 6.40x industry averages.

CGC has an F grade for Momentum, consistent with its 8.5% loss over the past month and 33.8% decline over the past three months.

CGC is ranked #188 of 190 stocks in the Medical – Pharmaceuticals industry. In addition to the POWR Rating grades I have just highlighted, we have also rated the stock for Growth, Sentiment, and Quality. Get all the CGC ratings here.

Bottom Line

Even though CGC has been making several developmental moves, it faces intense competition in the U.S. Cannabis market. It reported losses in the second quarter. Also, analysts expect its EPS to decline 296.7% next year and remain negative. So, we think the stock is best avoided now.

How Does Canopy Growth (CGC) Stack Up Against its Peers?

While CGC has an overall POWR Rating of F, one might want to consider investing in Medical – Pharmaceuticals stocks having an A (Strong Buy) rating: GlaxoSmithKline plc (GSK), Merck & Co., Inc. (MRK), and Johnson & Johnson (JNJ).

Click here to check out our Cannabis Industry Report

CGC shares rose $0.03 (+0.34%) in premarket trading Tuesday. Year-to-date, CGC has gained 0.23%, versus a -1.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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