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Canopy Growth: Several Potential Catalysts Make Growth Targets Achievable

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Given the possibility that the cannabis industry will clear regulatory hurdles in key growth markets, cannabis stocks have been trending higher.

According to a Markets And Markets report, it’s estimated that the global cannabis market was worth $20.5 billion in FY2020, and by FY2026, the market size is expected to increase to $90.4 billion. Based on this growth outlook, cannabis stocks are likely to remain in the limelight.

Specifically, one name stands out in the space: Canopy Growth Corporation (CGC). In the last six months, CGC has surged 56%.  

Considering the potential growth triggers, it seems very likely that CGC stock will continue to remain in an uptrend.

Positive Growth Catalysts

It should be noted that the industry is going through a consolidation period. In December 2020, Aphria (APHA) and Tilray (TLRY) announced a merger agreement, with the closure of this deal standing to create the largest global cannabis company.

More recently, Canopy Growth announced the acquisition of Supreme Cannabis for a consideration of $435 million. Canopy claims that the combined entity would be the second largest player in Canada’s recreational cannabis market.

As industry consolidation continues, Canopy Growth has ample financial flexibility to pursue additional opportunistic acquisitions.

Growth Targets Appear Realistic

For the third quarter of 2021, Canopy Growth reported year-on-year revenue growth of 23% to C$152.5 million. The company, however, has an ambitious growth target for FY2022 to FY2024, with it expecting revenue growth to be in the range of 40% to 50% during this period. It seems that the target is achievable for several reasons.

First and foremost, if its performance during the last quarter is annualized, Supreme Cannabis is likely to deliver incremental revenue of $75 million. With international medical presence in Israel and Australia, Supreme is positioned for strong growth.

Furthermore, there are hopes for promising cannabis reforms in the U.S. If the U.S. market expands, achieving 50% top-line growth will most likely not be a challenge.

On top of this, Canopy Growth already has an attractive portfolio of products. For example, Martha Stewart health and wellness products have witnessed strong consumer demand in the U.S. What’s more, the launch of cannabis beverages and its presence in the German medicinal cannabis market reflect key growth drivers.

From a profitability perspective, the company reported an adjusted EBITDA loss of $68.4 million in Q3 2021, narrowing on a year-over-year basis. It’s also worth noting that Supreme Cannabis is already adjusted EBITDA positive.

With merger synergies along with cost cutting measures, Canopy Growth expects to achieve positive adjusted EBITDA by the second half of 2022. Additionally, the company is targeting an adjusted EBITDA margin of 20% by FY2024. This seems realistic if the company continues to make inroads in important markets like Canada, Germany and the United States.

Analysts Weigh In

Canopy Growth’s Hold consensus rating breaks down into 1 Buy, 9 Holds and 3 Sells. As for the average analyst price target, at $35.73, it suggests 29% upside potential. (See Canopy Growth stock analysis on TipRanks)  

Key Risks

Canopy Growth has a target of delivering positive operating cash flow in FY2023 and positive free cash flows by FY2024. As internal cash flows drive growth, valuations are likely to adjust significantly to the upside.

In terms of risks, the de-regulation timeline for the U.S. cannabis market is critical. Additionally, Canopy Growth did report cash and short-term investments of $1.6 billion as of Q3 2021. However, with several more quarters of guided cash burn, further dilution might be in the cards.

Concluding Thoughts

Overall, positive growth triggers far outweigh the risks. Considering the industry growth outlook over the next five years, it makes sense to consider some exposure to CGC stock.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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