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Canopy’s shrinking pot stash prompts analyst downgrade

The company said its finished goods totaled $22 million when it reported third quarter financial results on Thursday, down significantly from $56 million in the previous quarter.

Canopy Growth Corp. (WEED.TO) may not have a big enough weed stash to hold onto its powerful grip on Canada’s newly legal recreational market, GMP Securities warned on Tuesday.

Analyst Martin Landry cautioned Canopy’s shrinking inventory could impair its ability to sustain near-term growth and allow competitors to move in on its 30 per cent hold on Canadian adult-use sales.

The company said its finished goods totaled $22 million when it reported third quarter financial results on Thursday, down significantly from $56 million in the previous quarter.

“We are concerned by the company’s low inventory levels,” Landry wrote in a research note. “Canopy’s competitors could catch up with better inventory availability and significant
capacity expansion plans, which could result in declining market share.”

Landry shaved $5 off his price target for Canopy shares, from $70 to $65, and downgraded the stock from a buy to a hold rating.

He notes Canopy’s supply of dried flower declined in recent weeks compared to last fall in Ontario, Quebec, and Alberta, three of Canada’s largest markets. Oils and softgels, a growing revenue driver for the Smiths Falls, Ont.-based producer accounting for 30 per cent of Q3 sales, were not included in GMP’s analysis.

“In the face of strong product demand and overall sector supply shortages, the inventory levels have served to improve the availability of the company’s products on retail store shelves,” Canopy management wrote in the company’s third quarter filing.

GMP found the number of Canopy product SKUs listed for sale on Ontario, Quebec, and Alberta’s government-run online stores declined in the past month to under 20 per cent. Canopy now ranks third behind Aurora Cannabis Inc. (ACB.TO) and OrganiGram Holdings Inc. (OGI.V) based on the number of available SKUs in those marketplaces. Aurora and OrganiGram accounted for over 40 per cent and about 20 per cent, respectively.

Aurora said it captured 20 per cent of Canadian recreational sales when the company reported second quarter results last week

Canopy generated $72 million in gross recreational marijuana revenue in its latest quarter, above Landry’s $60 million forecast. However, total volume sold in the recreational market came in at the equivalent of 8,288 kilograms, slightly below his 10,000 kilogram projection.

Landry said an unclear path to profitability and “high investor expectations” also factored into his downgrade. He said the company needs to “better articulate its path to profitability,” as sales, general and administrative costs come in higher than sales.

“Investors will soon turn their attention to profitability levels and WEED could be the last one to generate positive EBITDA amongst our coverage universe,” he wrote.

Toronto-listed Canopy shares have climbed 60 per cent year-to-date as of Friday’s close.

“This impressive performance is warranted given the company’s leadership role in the global cannabis industry,” Landry wrote. “However . . . we believe that WEED’s shares
may need a pause before the next leg-up.”

Shares fell 3.36 per cent to $60.67 at 1:57 p.m. ET on Tuesday.

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