Canopy Earnings: Profit Losses Narrow, but Cash Burn and Dilution to Existing Equity Will Continue

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 WEED 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.

We see some positive signs in Canopy’s first-quarter results. Sales were up about 3% over the prior year quarter, with its non-cannabis growth offsetting the declines in cannabis. But more importantly, adjusted EBITDA losses narrowed by about CAD 20 million to CAD 58 million, reflecting its cost-cutting efforts. Excluding the negative contributions from the investment into BioSteel, losses are closer to CAD 25 million. Still, we think it’ll become increasingly harder to find cuts that don’t materially affect the business over time. Management thinks they can reach breakeven adjusted EBITDA excluding BioSteel by the end of this fiscal year, but we remain skeptical. We forecast full-year adjusted EBITDA losses of CAD 168 million, and think it’ll take a couple more years before breakeven is reached.

Even with the progress on narrowing losses, the company continues to burn cash, with CAD 151 million in free cash outflow during the quarter. At the end of the quarter, the company had more than CAD 1 billion in debt. After dealing with near-term maturities, it expects debt to fall to about CAD 570 million. However, we’re concerned with the dilution the company has put on existing shareholders to deal with it, as it issues new shares and convertible debt below intrinsic value. The share count grew 10% in the quarter, and we expect it to grow even more in the coming years.