Canopy’s Weak Q3 Triggers More Cost Cutting; Lowering Fair Value Estimate on Lower Long-Term Profit Potential

Canopy Growth’s third-quarter fiscal 2023 was weaker than we expected. Net revenue decreased about 14% sequentially due to lower sales in the Canadian recreational market, and adjusted EBITDA losses widened for the third quarter in a row. Management announced cost cuts to mitigate near-term losses in response to continued Canadian weakness. But we think it is difficult to improve profitability when the topline is shrinking. We have updated our model to reflect a weaker Canadian market, partially offset by reduced expenses, and slash our Canadian fair value estimate for the no-moat firm to CAD 8 from CAD 14. Our U.S. dollar-denominated fair value estimate drops accordingly to $6 from $10. Because the company has yet to reach profitability, changes to topline trajectory and long-term margin potential lead to dramatic changes in fair value, exemplifying the very high uncertainty rating. Despite cutting our valuation, shares remain undervalued, particularly given the upside potential from its U.S. assets.