Canopy: Slashing Fair Value Estimate and Increasing Uncertainty Rating as Massive Dilution Coming

After reviewing Canopy’s fiscal fourth-quarter results, we are drastically cutting our fair value estimates to $0.80 and CAD 0.90 per share from $6 and CAD 8, respectively. The major drivers of these revisions are continued challenges in the Canadian legal cannabis market, the execution of Canopy USA as currently proposed, and the massive amount of debt coming due over the next few fiscal years. In addition, we affirm our no-moat rating, raise our Morningstar Uncertainty Rating to Extreme from Very High, and lower our capital allocation rating to Poor from Standard. Although shares trade below our fair value estimates, we caution that there is a high risk of further declines after a 25% drop last week.