Why is Canopy Growth Stock so Expensive?

There may be bigger problems than the BioSteel bust.

Andrew Willis 22 September, 2023 | 4:39AM
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Key Takeaways for Canopy Growth Stock

  • Bankruptcy may help stem BioSteel’s cash burn but likely hurts the valuation of any potential sale.
  • Canopy has yet to generate positive free cash flow and faces a massive amount of debt coming due.
  • Canadian cannabis growth is diluted by too many licensed producers and the illicit market, but Canopy’s U.S. assets should benefit from possible federal legalization.

 

Andrew Willis: So, sports drinks eh? That one was always a bit of a head-scratcher for us. Cannabis doesn’t exactly go hand in hand with athleticism. Similarly, we didn’t see much synergy between BioSteel and Canopy Growth (WEED).

Strategist Kristoffer Inton says Canopy’s decision to diversify into non-THC products may have added to the top line, but it’s unclear how much BioSteel contributed to bloated fixed costs at the company when dealing with such disparate production lines.

Massive Debt Coming Due for Former Cannabis Unicorn

Canopy still hasn’t generated free cash flow and we’re worried about the continued cash burn and massive amount of debt coming due. Canopy’s largest remaining cannabis business in Canada faces slow growth with intense competition and the illicit market. Now we’re watching Canopy’s U.S. assets ahead of potential legalization in the hopes of a boost for investors before any more cash goes up in smoke.

For Morningstar, I’m Andrew Willis.

bulls Canopy Bulls Say

  • Canopy Growth’s plans to create Canopy USA to strengthen its competitive position before U.S. federal legalization.
  • Canopy's non-THC assets provide diversification and growth that help offset the still-growing and unprofitable cannabis business.
  • Canopy will be able to slash its costs and focus its business, so profitability can be reached sooner than our forecast of 2026.

bears Canopy Bears Say

  • While Canopy waits for U.S. federal legalization to enter the THC market there, U.S. multistate operators continue to grow bigger and become more competitive.
  • Canopy will need to issue equity at a massive discount to our fair value estimate, diluting existing shareholders and destroying value.
  • The existence of the illicit market limits the potential price increases that Canopy can push through to consumers.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Canopy Growth Corp10.70 CAD-3.95Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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