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Tuesday, Dec 7, 2021
Mugglehead Magazine
Cannabis & psychedelics industry news based in Vancouver, B.C.
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Analysis

Canopy shares surge on 2022 profit prediction

Despite reporting a $829M Q3 loss, shares are up as the Canadian weed giant predicts US legalization will spur profits

Canopy shares surge on 2022 profit prediction
Canopy shares surge on 2022 profit prediction

After shutting down greenhouses and cutting up to 1,000 workers in 2020, Canopy Growth Corp. (TSX: WEED) expects to turn a profit in 2022.

On Tuesday, the Canadian pot giant said improved operational execution drove record net revenue to $153 million in its fiscal third quarter ended Dec. 31.

Reflecting upon his first year as CEO, David Klein said he’s extremely proud despite the company’s difficult decisions to right size its production footprint and terminate employees. The top boss says Canopy is more agile to grapple with the Canadian recreational market that’s grown at a slower rate than first anticipated.

“We’re at the end of that transition year and our team has made great progress,” Klein said in a conference call with analysts. “We are firmly on a path to profitability.”

Canopy stock rose nearly 12 per cent Tuesday to $62.35 on the Toronto Stock Exchange. The company’s share price has nearly doubled since the start of the year.

But the Ontario-based company booked a net loss of $829.3 million in the third quarter, which it said was largely driven by a number of impairment and restructuring charges related to late-year cuts. Last December, Canopy shut down five of its Canadian facilities and laid off 220 workers in order to save up to $200 million a year.

Klein said the trend of reporting massive losses will eventually come to end as the firm executes its new strategy across core markets.

Canopy’s sales climbed 13 per cent quarter-over-quarter, driven by revenue increases in Canadian recreational and international medical markets, as well as its BioSteel beverage business and U.S. CBD unit.

Canopy hinges profit hopes on US legalization

Canopy sells Martha Stewart CBD product in 580 U.S. Vitamin Shoppe locations. Press photo

Accelerating its U.S. growth strategy is key to reaching profitability in the second half of its fiscal 2022, Canopy says.

Cowen analyst Vivien Azer asked Klein if he’s confident that Canopy will reach its stated financial targets considering the volatility of the cannabis sector compared to alcohol.

The chief executive pointed to continued growth in the German medical and Canadian recreational markets. But he emphasized how Canopy is already making ground in the U.S. CBD market and is in a unique position to capitalize on THC sales if and when they’re federally legalized.

“So a lot of moving parts, Vivien,” Klein said. “But we feel that we’ve got our arms around enough of the detail to have a high degree of comfort in being able to put these numbers out.”

With Democrats holding power in the White House and Congress, the firm expects significant cannabis reform in America this year. To ensure progress, Canopy and a new coalition of top North American operators, advocacy groups and trade organizations formed the U.S. Cannabis Council to work with federal lawmakers on Captiol Hill.

Read more: Canopy, Curaleaf, advocacy groups join forces to advance US cannabis reform

Hopes are high. Shares in Canopy and the broader cannabis sector have rallied since three top Democratic lawmakers said last week they plan to remove weed from America’s list of Schedule 1 drugs this year.

Senators Cory Booker, Ron Wyden and Majority Leader Chuck Schumer stated a plan to introduce a draft legalization bill early this year with a focus on restorative justice and public health, as well as responsible taxes and regulations.

Canopy is the only Canadian firm with an immediate stateside opportunity when federal legalization arrives. The firm would be able to close its deal to buy Acreage Holdings (CSE: ACRG.A.U) and possibly buy a bigger stake in TerrAscend (CSE: TER), which are both sizable multi-state operators.

“We believe that this legislative package or a combination of reform measures could allow Canopy to enter the U.S. THC market during calendar 2021,” Klein said.

Canopy is already focused on building its U.S. cannabidiol brands, which it expanded in the third quarter with celebrity chef Martha Stewart.

The company released Stewart-branded CBD gummies and tinctures last September, which are sold online and in hundreds of U.S. nutrition stores.

“In just four months since launch, Martha Stewart CBD products have already exceeded the annual sales of over 94 per cent of all CBD brands sold in the U.S,” Klein noted. “And based upon the current run rate, Martha would rank among the top 3 per cent of all CBD brand.”

Canopy expanded the Stewart product line to include pet CBD products this month, which its says has already received record press coverage earning over 1 billion media impressions.

Read more: Martha Stewart and Canopy Growth release CBD dog treats — but are they safe?

Canopy shares surge on 2022 profit prediction

Canopy’s Houseplant Grapefruit THC-infused beverage is sold across Canada. Press photo

Steady, not significant, growth expected in Canadian adult-use market

North of the border, Canopy’s third-quarter Canadian recreational market share ticked up to 15.7 per cent, compared to 15.5 per cent in the previous quarter.

The firm’s beverages reportedly captured 34 per cent market share, even as new beverage brands have entered the marketplace.

Canopy CFO Mike Lee said beverage sales will remain muted in the country until larger quantity purchases and consumption lounges are permitted.

He added that Canopy’s 80 per cent of sales will continue to be driven by dried flower and pre-rolled joints over the next 12–18 months.

The company expects the Canadian adult-use market to grow 40 per cent this year, relative to a projected $2.6 billion in 2020. In 2023 and 2024, the firm estimates growth of 25–30 per cent.

Canopy booked an adjusted earnings before interest, taxes, depreciation, and amortization loss of $68 million in the third quarter, compared to an EBITDA loss of $85.7 million in the second quarter. The firm expects to hit positive adjusted EBITDA during the second half of 2022.

Cash and short-term investments were a reported $1.59 billion as of Dec. 31, down from $1.72 billion Sept. 30.

Top image via Canopy

 

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