What is the worst thing an investor could hear from a market share leader? According to Jefferies’ analyst Owen Bennett, it is probably the need to "understand what consumers want.”
And that’s just what Canopy Growth (CGC) has said. According to the analyst, the Canadian cannabis producer’s disappointing FQ4 results indicate “things are worse than thought.”
Canopy's Q4 net revenue came in at C$107.9 million, well below the C$128.9 million estimate and down by 13% from the previous quarter. The enormous overall net loss of C$1.3 billion, amounted to C$3.72 per share, far worse that the Street’s expectation of C$0.59 per share. Cue investors running to the exit door and a drop of 20% in the following trading session.
Bennett recently upgraded Canopy’s rating from Sell to Hold, based on the reasoning “top line pressures were better understood,” and under the impression cost saving actions were moving the company in the right direction.
Pointing out the slim bull case for Canopy rested on “increased focus on cost structure and profit delivery,” the analyst believes the turnaround appears more sluggish than anticipated as evidenced by operating expenses. Instead of improving, these increased by 17% compared to the previous quarter.
Additionally, looking ahead, Canopy reduced expectations, describing FY21 as a “transition year,” and taking off the table previous forecasts for when it would achieve positive adjusted EBITDA.
Along with the letdown of the report, the tone coming from Canopy’s direction has not impressed Bennett, who said, “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 legalisation, not over a year into it, and especially from a market share leader.”
To this end, Bennett reiterated a Hold and has a C$22.00 (US$16) price target on Canopy shares. (To watch Bennett’s track record, click here)
Most of Wall Street echoes a neutral point of view, with TipRanks analytics exhibiting Canopy Growth as a Hold. Based on 15 analysts tracked by in the last 3 months, 2 say Buy, 10 suggest Hold, while 3 recommends Sell. Meanwhile the 12-month average price target stands at C$22.44, which aligns with where the stock is currently trading. (See Canopy Growth stock analysis on TipRanks)
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