To say that things did not go as planned for marijuana stock industry in 2019 would be an accurate statement. High tax rates in select U.S. markets, and persistent supply problems throughout Canada, allowed an already resilient black market to prosper in North America. This, in turn, wound up clobbering cannabis stocks.
But according to Wall Street, things should get better. Aside from the fact that various analysts have projected annual worldwide weed sales of…
$50 billion to $200 billion by 2030, almost every pure-play pot stock with a market cap of at least $200 million has a higher consensus price target from Wall Street than their current share prices. That’s really not a surprise given how Wall Street tends to be highly optimistic on high-growth businesses and always forward-looking.
However, what you might find surprising is that two of the most popular pot stocks in the world happen to be the only companies in the marijuana industry with lower consensus price targets than their current share price. Translation: Wall Street actually expects these pot stocks to decline in value over time.
Let’s take a closer look at these two marijuana stocks and find out why Wall Street might be pumping the brakes on their current valuation.
Canopy Growth: Implied downside of 9.5%
First up is only the largest marijuana stock in the world by market cap, Canopy Growth (NYSE:CGC). According to Wall Street’s consensus price target, Canopy has nearly 10% downside from where it closed this past Wednesday, Jan. 22.
On paper, Canopy Growth looks to have a number of factors and intangibles that would work in its favor. It should be the leading or No. 2 pot producer in Canada, is the leading cannabis company in cash on hand, is No. 2 in international presence, and has supply deals in place with all of Canada’s provinces. This looks like a winning recipe. But if you’ve in any way been following Canopy Growth over the past two years, you’ve watched the company’s income statements and balance sheet deteriorate, which is likely why Wall Street has become so cautious.
In Canopy Growth’s fiscal second-quarter operating results, the company recorded only $76.6 million Canadian in net sales, representing a 15% decline from the sequential quarter. A big portion of this decline was tied to a CA$32.7 million revenue adjustment related to oversupply and weak demand for its higher margin softgel and oil products. Comparatively, the company’s share-based compensation alone outpaced its net sales. All told, Canopy lost CA$265.8 million on an operating basis in Q2 2020, and nearly CA$389 million (also on an operating basis) through the first six months of its current fiscal year. Canopy Growth is nowhere near profitability, and its price target reflects this.
Wall Street’s skepticism is also factoring in the company’s worsening balance sheet. On one hand, the nearly CA$5 billion in cash on hand that Canopy had on its balance sheet following the closure of Constellation Brands‘ $4 billion (that’s U.S. dollars) equity investment has fallen to CA$2.74 billion in cash and short-term investments in nine months. While this cash does act as a buffer, Canopy’s aggressive expansion activity, coupled with its huge operating losses, is quickly whittling away its hoard.
On the other hand, Canopy’s overzealous expansion led it to grossly overpay for a number of acquisitions. The company’s goodwill has ballooned to CA$1.91 billion, or 23% of its total assets. This percentage is likely to continue climbing given the company’s dwindling cash pile, and the unlikelihood of Canopy recouping a significant portion of its goodwill. In other words, Wall Street may already be factoring in a sizable writedown.
Canopy Growth may have name-brand appeal, but it and its new CEO have a lot to prove, as reflected by Wall Street’s price target.
Cronos Group: Implied downside of 16.8%
The same goes for Cronos Group (NASDAQ:CRON), which is even more “overvalued” in the eyes of Wall Street. According to analysts, Cronos should have about 17% downside, based on its closing price on Jan. 22.
What’s really interesting about Cronos Group being the other company deemed as pricey by Wall Street is that it happens to be No. 2, behind Canopy Growth, in cash on hand. It goes to show that cash can only act as so much of a buffer when a company’s business isn’t performing as expected.
Despite ending the most recent quarter with nearly CA$2 billion in cash and cash equivalents, as well as recording three consecutive quarterly profits (all thanks to the revaluation of derivative liabilities), Wall Street is likely skeptical of Cronos Group for three key reasons…
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