Canopy Growth (Nasdaq: CGC) is one of the world’s largest cannabis companies, but lately, it’s been grabbing headlines for all the wrong reasons.
The Canadian producer and distributor of cannabis products has seen its stock price take a beating over the past couple of years as it’s worked through significant restructuring and cost-cutting.
The company, which produces everything from dried cannabis flower to beverages and edibles, is trying to pivot toward profitability after years of aggressive expansion. It’s made big moves into the U.S. market through its Canopy USA business and has maintained strong positions in medical cannabis markets across Europe and Australia.
So, is the stock a bargain at current prices?
Let’s run the numbers through The Value Meter and see what we find.
At first glance, Canopy Growth might look cheap. Its enterprise value-to-net asset value (EV/NAV) ratio sits at 1.73, which is well below the average of 6.35 for companies with positive net assets. This suggests you could theoretically buy all of the company’s assets at a significant discount.
But here’s where things take a turn for the worse: Canopy Growth has posted negative free cash flow in each of the past four quarters, and its quarterly free cash flow has averaged -7.53% of its net assets during that span. While that’s better than the -18.25% average for companies with similar cash flow struggles, the company is still burning through cash at an alarming rate.
That cash burn becomes even more concerning when you look at Canopy’s debt load. The company carried nearly 558 million Canadian dollars in long-term debt last quarter, with only CA$192 million in cash on hand. It’s been scrambling to restructure and pay down debt through various initiatives, including selling off non-core assets, but clearly, it still has a long way to go.
Canopy also posted revenue of CA$75.8 million during the quarter – down from CA$88.6 million in the same quarter a year ago – and it reported a net loss of CA$127.1 million, a sharp deterioration from its CA$38.1 million net loss a year prior.
That being said, management is making some smart moves, like streamlining operations and focusing on higher-margin opportunities. Their decision to stop funding Canopy’s troubled BioSteel business shows that they’re willing to make tough choices to protect the balance sheet.
However, the company’s turnaround hinges heavily on U.S. cannabis legalization and the success of Canopy USA, its vehicle for U.S. expansion. That’s a big bet with an uncertain timeline.
So what’s the bottom line? While Canopy’s low EV/NAV ratio might make it look like a bargain, the persistent negative cash flow and heavy debt burden suggest otherwise. The current stock price seems to be pricing in a successful transformation that’s far from guaranteed.
While the company has valuable assets and strong market positions, the ongoing cash burn and execution risks make the current valuation hard to justify.
For now, The Value Meter rates Canopy Growth as “Slightly Overvalued.”
What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.
