The cannabis sector may be facing another battle this week after leading Canadian Licensed Producers (LPs), Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) and Aurora Cannabis Inc. (TSX: ACB) (Nasdaq: ACB) received lower price targets from separate broker-dealers.
Late last night, Piper Sandler lowered its price target on Canopy Growth to $15 from $19 (USD) and MKM Partners lowered its price target on Aurora Cannabis to C$6 from C$9. As of this morning (September 20th), Aurora Cannabis is trading almost $2.50 above the price target that was issued by MKM, while Canopy Growth is trading slightly below the price target that was issued by Piper Sandler.
Interpreting the Series of Lower Price Targets on the Canadian LPs
After Piper Sandler lowered its price target on Canopy Growth, Cantor Fitzgerald lowered its price target on the Canadian LP to C$21.00 from C$30.50. The broker-dealer slashed the price target due to a lower sales outlook as a result of pricing pressure. Cantor Fitzgerald expects Canopy Growth’s quarterly revenue to be C$135 million, which is well below Wall Street’s expectation for C$156 million of revenue.
Although Cantor Fitzgerald expects Canopy Growth to benefit from having a full quarter of results from Supreme Cannabis included in the quarter, it expects the increase to be offset by a decline in revenue in Canada. If the Canadian LP reports stronger-than-expected revenue, we expect to see a favorable response from the market and will monitor the opportunity from here.
Based on the price target that was issued to Aurora Cannabis, there is more than 40% downside to current levels. We consider this to be a substantial amount of potential downside risk and will monitor how the market responds to the change prior to Aurora Cannabis’ next quarterly earnings report.
Earlier this month, Jefferies upgraded Aurora Cannabis to Hold from Sell but lowered its price target by almost C$1. At the time, Jefferies issued the Canadian LP a C$8.56 price target which is well above the price target that was issued by MKM. Going forward, we will monitor how other broker-dealers respond to the change and would not be surprised to see more firms issue new price targets to Canadian LPs.
Lower Price Targets are a Consistent Trend in the Cannabis Sector
So far this year, the trend of broker-dealers lowering respective price targets and downgrading ratings on North American cannabis companies has been consistent (especially with Canadian LPs). During the last quarter, this trend became much more significant which caught us by surprise and will provide updates on how it changes in the near-term.
During the last few months, we have been surprised by the performance of leading US multi-state operators (MSOs) after several companies published quarterly earnings results that showed impressive growth on a variety of key valuation and liquidity metrics (i.e. revenue, adjusted EBITDA, cash on hand, and more).
The last few months have been challenging for the cannabis sector and several leading operators have come under heavy pressure during this time. Many high-profile companies have seen their stock price fall by more than 20% from its 2021 highs which would signal that the company is in a bear market.
Going forward, we do not expect the sector to continue to remain under such pressure and believe that the sector will bounce back before the end of the year. One of the biggest potential catalysts for the industry is improving odds of federal legalization in the US and we believe that any advancement on this front could be the spark the sector needs.
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