Canopy Growth: Downward Spiral (NASDAQ:CGC)

The Canadian cannabis space continues to destroy shareholder wealth with the horrible results from industry leader Canopy Growth Corporation (NASDAQ:CGC). The company appears to have completely abandoned past plans and embarked on a full restructuring with the Canadian business after years of destroying shareholder wealth. My investment thesis remains ultra Bearish on CGC stock until all restructurings end and the business returns to growth.

Another Reset

Canopy Growth’s reported FQ3’23 revenues fell 28% to only C$101.2 million while missing analyst targets by C$15.2 million. The Canadian cannabis company again failed to make any progress towards achieving positive cash flows with quarterly adjusted EBITDA losses at a massive C$87.5 million.

The company already jumped on a restructuring plan back in April 2022 in order to reduce SG&A costs by C$100 to C$150 million. Canopy Growth had already achieved C$80 million in cost cuts, though these numbers aren’t exactly visible in the results.

The problem facing Canadian cannabis companies is that these employee reductions and marketing cuts only lead to consistently lower revenues in the process. The business faces a never-ending downward spiral until Canopy Growth can sell cannabis without excessive costs.

The new reset has the cannabis company exiting the cultivation business after selling the retail store operations in Canada. Ironically, Canopy Growth continues pushing towards U.S. businesses with large cultivation assets and retail stores.

Again, the company continues to struggle with a large swath of revenue channels with major problems. Even the BioSteel business saw revenues slip 4% YoY despite the company promoting a large sequential revenue increase.

Even the once-promising International cannabis business saw revenues slip 54% to only C$5.8 million. Canopy Growth only produced a 1% adjusted gross margin in the quarter in another sign of the struggles of a business with no profit driver to fund growth in any other sector.

The new reset has Canopy Growth starting more initiatives to reduce annual CoGS and SG&A by a combined C$140 to C$160 million. The overall plan since the reductions announced last April amount to C$240 to C$310 million in cost reductions.

The problem is that Canopy Growth will only strip out C$40.0 million in additional quarterly costs from a business currently with an adjusted EBITDA loss of C$87.5 million. The path to being profitable in FY24 appears impossible when the CoGS are so insanely high. After all, the Canadian cannabis company only produces a gross margin of 40%, if revenue remains stable during all of these cost cuts and all of the expenses are attached solely to CoGS.

Of course, Canopy Growth isn’t exactly harmed by losing revenue with no gross margins. The company still has a large operating expense base to cover and large cash flow burn beyond the EBITDA losses impacting the financials.

The Canadian cannabis company had an operating cash flow burn of C$143.9 million in the quarter due to excessive spending on inventory that doesn’t even show up in operations. Canopy Growth exiting the cultivation business could help this metric, but the company still has to correctly purchase the right quantity of cannabis product from wholesalers in order to generate positive cash flows.

At least Canopy Growth no longer has excessive spending on capital equipment. The company only spent C$1.9 million in the quarter on capex, yet the business still burned C$145.8 million in free cash flow for the December quarter alone.

No Valuation

Canopy Growth has now amassed 486 million shares, still placing the stock valuation at ~$1.2 billion. The company only produced C$100 million in quarterly sales, and the massive restructuring will ultimately impact sales again while the net debt position continues to rise.

Even if Canopy Growth stock still produced C$400 million in annual sales equivalent to $300 million, the stock still trades at over 3x sales targets. A lot of cannabis stocks without restructurings ahead and highly EBITDA profits trade closer to 1x forward sales targets. Both Curaleaf Holdings, Inc. (OTCPK:CURLF) and Trulieve Cannabis Corp. (OTCQX:TCNNF) are in far better financial positions and trade at much lower multiples.

The stock isn’t even cheap in the cannabis space and investors can’t trust the turnaround will work. At the same time, Canopy Growth is still working on restructuring the U.S. assets after running into problems with the Nasdaq listing under the proposed plan.

Takeaway

The key investor takeaway is that investors need to dump Canopy Growth Corporation at all prices. The business is still far away from being EBITDA profitable and the new reset will only disrupt the remaining business.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.