Why Canopy Growth Stock’s (TSE:WEED) 52% Rally is Likely a Façade

Canadian cannabis firm Canopy Growth (TSE:WEED) (NASDAQ:CGC) has made multiple announcements regarding plans to boost its financial position by improving liquidity and decreasing debt. That, combined with the stock being oversold, resulted in it gaining over 43% in today’s trading session on the TSX and over 52% on the U.S. exchange yesterday (when the Canadian market was closed for holidays).

However, is this news enough to sustain the stock’s rally? We don’t think so and are bearish on the stock. Let’s look into the recent developments and analyze the company to see why.

Why Did Canopy Growth Stock Soar?

Canopy Growth has rolled out a business strategy aimed at improving profitability by reducing its debt load by US$188 million and offloading facilities to generate an additional C$150 million in cash. This follows a difficult fiscal year for the firm, which saw a 21% decrease in revenue, totaling C$402.9 million, and a considerable loss of C$3.31 billion. By the end of 2024, the company projects positive earnings before interest, taxes, depreciation, and amortization (EBITDA), excluding its BioSteel business. This suggests a period of potential instability and risk for investors.

Also, in a move to strengthen its financial position, Canopy Growth recently wrapped up all the conversions associated with its US$100,000,000 unsecured debentures, initially sold to an institutional investor in early 2023. This measure is part of several actions the company has taken since the start of Fiscal 2023, aimed at bolstering its financial stability and fostering a more profitable environment.

As part of these steps, the company has transformed C$263 million worth of unsecured notes, due this month, into equity. The firm is exploring additional strategies to further enhance liquidity and cut down on the amount of cash it’s burning through.

Is This Enough to Stop the Bleeding?

It’s nice that Canopy is trying to fix its problems, but management’s optimism can’t always be relied on. If you look at the numbers, you’ll see that Canopy Growth has a poor track record of meeting analysts’ estimates. Therefore, we wouldn’t be surprised if the company doesn’t meet its profitability goals in time. 

Also, Canopy expects EBITDA profitability by the end of 2024, but that’s over a year away, and EBITDA profitability isn’t “real” profitability (such as net-income profitability). Additionally, Canopy has never been profitable on a cash-flow basis, so its business model hasn’t been proven yet. 

Therefore, we aren’t so optimistic about Canopy’s prospects and would rather wait to see if it can achieve positive cash flow within the next few years before even considering buying.

Is Canopy Growth Stock a Buy, According to Analysts?

According to analysts, Canopy Growth stock comes in as a Moderate Sell based on three Holds and five Sells assigned in the past three months. Nevertheless, the average Canopy Growth stock price target of C$1.09 implies 41.5% upside potential.

If you’re wondering which analyst you should follow if you want to buy and sell Canopy Growth stock, the most accurate analyst covering the stock (on a one-year timeframe) is John Zamparo of CIBC, with an average return of 26.66% per rating and a 64% success rate. Click on the image below to learn more.



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