Canopy Earnings: Putting Shares Under Review Amid Transformation Plan and Increased Risk of Dilution

We are placing no-moat Canopy WEED 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.

Last-12-months gross cannabis revenue is now 25% lower than Tilray’s, whose growth will benefit from the acquisition of Hexo, which closed today. Furthermore, while Tilray continues to generate positive adjusted EBITDA, Canopy lost CAD 96 million in adjusted EBITDA in its fiscal fourth quarter 2023. Canopy management’s transformative plans to immediately boost profitability should help, but its goal of reaching breakeven by the end of 2024 seems lofty. Additionally, outsourcing supply, job cuts, and reducing expense will likely affect growth even if they can deliver immediate incremental progress to profitability.

In its full-year filing, which was delayed due to control issues within its BioSteel sports drink business, management highlighted increased risk around Canopy’s ability to continue as a going concern given continued losses and upcoming debt maturities. About CAD 470 million is due in fiscal 2024, though its cash balance of CAD 783 million should cover it. We think refinancing or share issuance is the likely outcome. But with another CAD 790 million maturating in fiscal 2026 though, Canopy needs to stem losses quickly. Canadian licensed producer Aurora faced a similar predicament before and avoided bankruptcy, but at the cost of severe dilution to existing shareholders. That same dilution risk has risen for Canopy shareholders especially given the falling share price, a contributing factor to us reviewing our ratings.