Last week shares of Canopy Growth (CGC - Get Rating) experienced a significant sell-off after reporting earnings.  The losses have continued this week as Wall St. analysts downgraded the stock.

Cantor Fitzgerald’s Pablo Zuanic says CGC has much downside risk following a disappointing fourth-quarter report.  The analyst listed four downside risks for the company:

• Worsening industry capacity glut in Canada
• Poor start to Cannabis 2.0, with the potential growth worsened by further regulation and slow opening of stores
• No positive new news on international med/CBD
• Misuse of the remaining cash holdings

Jefferies’ analyst Owen Bennett stated that it’s probably best to “understand what consumers want.” Bennett mentioned that “things are worse than thought.” Referring to their most recent quarter, Q4 net revenue came in at C$107.9 million, which missed expectations of C$128.9 million by a long shot down 13% from the previous quarter. The massive net loss of C$1.3 billion came to C$3.72 per share, which blew past expectations of just C$0.59 per share. This was the obvious reason for the stock’s 20% decline in a single day.

However, Bennett recently upgraded CGC’s rating from Sell to Hold, based on his view that  “top-line pressures were better understood,” and under the impression, cost-saving actions were moving the company in the right direction.  He has a price target of C$22.00 (US$16) price target on CGC shares.

Bennett pointed out the slim bullish case relied upon “increased focus on cost structure and profit delivery.”  The analyst believes that the turnaround has been far slower than expected due to operating expenses. Instead of improving their operating expenses, they increased by 17% compared to the previous quarter.

Bennett further stated that, “While it said it is addressing certain headwinds with a shift into value and more high THC offerings, what really concerned us was commentary around needing to “understand what consumers want”, and “servicing different segments”. This is just basics and an issue we flagged over 12 months ago when initiating (Canopy having a catch-all brand with no segmentation) and is something that in our view should be addressed prior to legalization, not over a year into it, and especially from a market share leader.”

Stifel on the other hand downgraded CGC to Sell from a Buy rating and lowered their price target to C$13 from C$18. Analyst Andrew Carter said, “Despite the 21% decline in the shares following the 4Q20 earnings release (S&P 500 +0.5%), we believe the valuation has yet to fully reflect the challenges ahead. Canopy withdrew near-term financial targets while positioning FY21 as a “transition year”-– positioning that reflects not only the uncertainty of COVID-19 but also necessary re-wiring for the organization. Canopy Growth sports the resources to deliver on its ambitions of leading growth in the global cannabis category, but the resources have yet to produce tangible evidence of an enduring right to win in the developing category.”

Despite it being the largest cannabis company by market capitalization, bullish investors have had to think twice about CGC.  It is our opinion that cannabis sector companies nowadays need to lead with results which is why for now, we remain neutral on the company.

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CGC shares . Year-to-date, CGC has declined -23.47%, versus a -3.72% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...

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