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On July 5th, an analyst changed his target on Canopy Growth to zero from C$1.75. The stock was trading then at C$0.73. Despite the aggressive target after such a big decline, the stock still fell further and continues to do so, posting a new all-time low on Friday.
Our readers didn’t have to wait for this speculation about the future price, as we have discussed the company many times. 4 weeks ago, we reiterated something that we had discussed previously, saying that other LPs offer investors better future returns in our view than Canopy Growth. The first post on the company that we shared in early January, when we talked about how the company was moving closer to financial trouble. It was trading then at C$3.20, and we posted a C$0.59 target. The stock traded well below that level subsequently.
So, is Canopy Growth a bargain here, or is it headed to zero? We think that it could be a zero, but this likely won’t happen immediately. We don’t think the company can get out of the situation it is in. For us, the big question to answer involves Constellation Brands, the company that owns a slug and is very underwater with its investment.
Recall that Canopy Growth is trying to keep its NASDAQ listing and close the purchases of three American cannabis companies, something about which we haven’t been optimistic from when it was announced. This, we believe, makes it difficult for Constellation to acquire the company, but perhaps Canopy Growth walks away from that idea. If so, Constellation could buy them.
We think that the situation at Canopy Growth has gotten a lot worse over the past six months. When it reported its Q4, it had C$782.6 million of cash, but its debt as of 3/31 was C$1.3 billion. The company, which used C$557.5 million to fund its operations in FY23, burned C$139.7 million. Money-losing companies with lots of debt face challenges, especially right now.
Over the past month, the company has made several announcements regarding its debt, including Friday’s news that is linked below. Our title alluded to the cash outlay and the large share issuance, but the payment of the debt also involved the issuance of a convertible note with a C$0.55 conversion price (73.5 million shares at conversion), way below where the stock was trading on Thursday. Near the end of June, the company announced the conversion of debt issued in February, but it didn’t reveal how many shares it issued. The SEC filing suggests that it was 98.9 million shares, though it may have been even more. Another bad thing about Q4 is how much the share-count went up, but Q1 will be worse. Adding just the shares for these two debt payoffs will boost it by about 263 million shares.
After Bruce Linton exited (ABLE) in 2019, Canopy Growth looked like it would be able to do well, and it did make a new all-time high in early 2021. The Constellation-appointed team, though, has done very poorly, burning through a very large amount of cash and pouring on debt while not building a good business. The stock is now down over 99% since then:
We continue to think that Canopy Growth is not a good choice for cannabis investors, and we urge our readers to be careful with the stock. It could ultimately go to zero, but it could also be acquired possibly before that time. For those that want to invest in Canadian LPs, we have shared several ideas in previous newsletters and continue to prefer them.
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Alan & Joel