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Stock Analyst Note

Shares of Canadian-licensed producers and US multistate operators rallied massively on news that the US Drug Enforcement Administration will proceed with rescheduling cannabis to Schedule III from Schedule I. Schedule I indicates it is considered to have a high potential for abuse and no medical value. In comparison, Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. We view the April 30 news as the next step in a long process by the Biden administration to relax the current federal prohibition. We view the market reaction as a reflection of how much pressure these stocks have faced rather than any new development.
Stock Analyst Note

The Bundestag, the lower house of Germany’s legislature, passed a cannabis bill last month that would allow possession of up to 25 grams and home-growing of up to three plants. The law will become effective April 1 as planned after the Bundesrat, the upper house, voted not to send it to mediation committee on March 22. The law expands on July 1 to allow nonprofit cannabis grow clubs of up to 500 members and 50 grams per member.
Company Report

Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 60% of sales. Unfortunately, the Canadian market is overloaded with too many licensed producers, leading to tough price competition and a stubbornly robust illicit market, so Canopy has yet to reach profitability. We forecast mid-single-digit growth over the next decade for the Canadian market, driven by the conversion of illicit consumers into the legal market. We expect competition to ease as continued industry losses drive consolidation.
Stock Analyst Note

Following no-moat Canopy’s fiscal third-quarter earnings, we expect to trim our fair value estimates of $8.50 and CAD 10 per share by a mid to high-single-digit percentage, mostly due to continued dilutive share issuances. Even though the shares trade well below our valuation, we reiterate our Extreme Morningstar Uncertainty Rating.
Stock Analyst Note

A reverse stock-split has been coming for no-moat Canopy, as shares have been trading below $1 on its Nasdaq listing since May, excluding a temporary recovery in September. Nasdaq’s listing rules require shares to trade over $1, so deficient companies have previously executed reverse stock-splits to drive their price higher by consolidating outstanding shares. This has no effect on the total value of the company and typically wouldn’t affect an investor’s holding.
Company Report

Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 60% of sales. Unfortunately, the Canadian market is overloaded with too many licensed producers, leading to tough price competition and a stubbornly robust illicit market, so Canopy has yet to reach profitability. We forecast mid-single-digit growth over the next decade for the Canadian market, driven by the conversion of illicit consumers into the legal market. We expect competition to ease as continued industry losses drive consolidation.
Stock Analyst Note

We don’t expect to make significant changes to our $0.80/CAD 0.90 fair value estimate for no-moat Canopy Growth after the release of fiscal 2024 second-quarter results. Even though the shares trade well below our valuation, we reiterate our Extreme Morningstar Uncertainty Rating. In particular, we think existing equityholders are likely to see significant dilution as cash burn continues and debt matures. During the quarter, the share count grew another 30% to more than 716 million. We think the dilution threat remains and model that shares could more than double as breakeven free cash flow remains years away.
Stock Analyst Note

On Sept. 14, no-moat Canopy Growth announced that it had immediately ceased funding of BioSteel Sports Nutrition, which has entered bankruptcy protection. This announcement followed comments made during Canopy’s fiscal first-quarter earnings release last month in which it stated that it was pursuing strategic options, including the potential sale, of BioSteel. Most likely, the decision to put it into bankruptcy protection signals that there was insufficient buyer interest. Moreover, although Canopy’s actions on BioSteel will stem its cash burn, we also think it is likely to hurt the valuation of any potential sale. Thus, we don’t expect a major change to our fair value estimates of $0.80 and CAD 0.90.
Stock Analyst Note

On Aug. 30, shares of the U.S. cannabis multistate operators rallied around 20%, with Canadian licensed producers up less, following news that the U.S. Department of Health and Human Services recommended to the Drug Enforcement Administration that it reclassify cannabis to a Schedule III drug from Schedule I. Cannabis, along with heroin and ecstasy, is currently listed as Schedule I, which means it is considered to have a high potential for abuse and no medical value. Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. Lower scheduling would not necessarily be a panacea for the cannabis industry, but it could be enough to bring some important benefits to U.S. multistate operators, including paying normal tax rates, improved banking access, and potential listing on a major U.S. stock exchange.
Company Report

Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 60% of sales. Unfortunately, the Canadian market is overloaded with too many licensed producers, leading to tough price competition and a stubbornly robust illicit market, so Canopy has yet to reach profitability. We forecast mid-single-digit growth over the next decade for the Canadian market, driven by the conversion of illicit consumers into the legal market. We expect competition to ease as continued industry losses drive consolidation.
Stock Analyst Note

After its release of its first-quarter fiscal 2024 results, we don’t expect to make significant changes to our fair value estimates for no-moat Canopy of $0.80 and CAD 0.90 per share. Even though shares trade well below these values, we reiterate our Extreme Uncertainty Rating. In particular, we think existing equityholders are likely to see significant dilution as cash burn continues and debt matures.
Stock Analyst Note

On July 14, no-moat Canopy Growth announced a series of transactions to deal with the CAD 468 million due this fiscal year. As we had expected, the company is using a mix of cash and massively dilutive equity issuances to deal with the debt that is set to mature. Our fair value estimates of $0.80 and CAD 0.90 per share remain unchanged. Though this sits above the current share price, we reiterate our Extreme Uncertainty Rating, largely reflecting the risk of value destruction.
Stock Analyst Note

After reviewing Canopy’s fiscal fourth-quarter results, we are drastically cutting our fair value estimates to $0.80 and CAD 0.90 per share from $6 and CAD 8, respectively. The major drivers of these revisions are continued challenges in the Canadian legal cannabis market, the execution of Canopy USA as currently proposed, and the massive amount of debt coming due over the next few fiscal years. In addition, we affirm our no-moat rating, raise our Morningstar Uncertainty Rating to Extreme from Very High, and lower our capital allocation rating to Poor from Standard. Although shares trade below our fair value estimates, we caution that there is a high risk of further declines after a 25% drop last week.
Company Report

Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 60% of sales. Unfortunately, the Canadian market is overloaded with too many licensed producers, leading to tough price competition and a stubbornly robust illicit market, so Canopy has yet to reach profitability. We forecast mid-single-digit growth for the Canadian market, driven by the conversion of illicit consumers into the legal market. We expect competition to ease as continued industry losses drive consolidation.
Stock Analyst Note

We are placing no-moat Canopy shares under our review as we update our long-term forecast for the continued challenges in the Canadian legal cannabis market as well as the company’s transformational business plans in response. We expect to materially cut our fair value estimates of $6 and CAD 8 per share respectively, as well as reassess our Standard Capital Allocation and Very High Uncertainty Ratings. Shares have fallen nearly 75% year-to-date, far more than the 25%-40% drop the other Canadian licensed producers we cover have experienced.
Stock Analyst Note

Canopy Growth’s third-quarter fiscal 2023 was weaker than we expected. Net revenue decreased about 14% sequentially due to lower sales in the Canadian recreational market, and adjusted EBITDA losses widened for the third quarter in a row. Management announced cost cuts to mitigate near-term losses in response to continued Canadian weakness. But we think it is difficult to improve profitability when the topline is shrinking. We have updated our model to reflect a weaker Canadian market, partially offset by reduced expenses, and slash our Canadian fair value estimate for the no-moat firm to CAD 8 from CAD 14. Our U.S. dollar-denominated fair value estimate drops accordingly to $6 from $10. Because the company has yet to reach profitability, changes to topline trajectory and long-term margin potential lead to dramatic changes in fair value, exemplifying the very high uncertainty rating. Despite cutting our valuation, shares remain undervalued, particularly given the upside potential from its U.S. assets.
Stock Analyst Note

Following a slower second fiscal quarter result for no-moat Canopy Growth, we maintain our Canadian dollar fair value estimate of CAD 14 and lower our U.S. dollar-denominated fair value estimate slightly to $10 from $11 on exchange rates. Net revenue grew 7% sequentially in the second quarter, up from a 1% decline in the first quarter. Our full-year net revenue forecast remains at about CAD 450 million, 18% lower than 2021 reflecting strategic pivots. But our forecast for full-year adjusted EBITDA losses widens to CAD 369 million from CAD 324 million on continued struggles in the Canadian cannabis market. The impact on our fair value is minimal as these ongoing challenges do little to affect our long-term outlook.
Stock Analyst Note

On Tuesday, Canopy Growth announced a unique transaction to execute and consolidate its outstanding options for U.S. assets. We like the deal but make no change to our $11 and CAD 14 fair value estimates, as we had already incorporated the economic value of the U.S. business. Nevertheless, it shows progress toward unlocking the U.S. assets’ value, which we long argued the market was missing. Even with Canopy’s stock price up 27% in reaction to the news, the no-moat name still trades in 5-star territory.

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