Canopy Growth Company: Leader in the Cannabis Industry

 Ticker: CGC

Rating: Overweight

Price Target: $39

Target Date: 1 year

💡 Know The Industry

Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful”. We think this holds true when we look at Canopy Growth Company (CGC). The broader cannabis market has broadly sold off nearly 50% over the past two months since ripping through all time highs in early February, 2021. Canopy is no exception, the stock closed yesterday at $27.86 per share, down >45% from its February 10th close of $52.17 per share.

As a reminder, we are quite bullish on the long term outlook for the cannabis industry. Last year, legal marijuana sales in the US were $17.58 billion annually. Most experts predict that number to more than triple, and surpass $60 billion by the year 2026. While those forecasts represent estimates for just the US, we believe this tripling in market size over the next 5 years to be a conservative estimate, as some other developed countries have accelerated efforts in recent years to legalize marijuana. There are many factors at play here, but one substantial catalyst for the uptick in legalization of marijuana is that cities and states are experiencing decreasing tax revenues because of lower economic activity as a result of the pandemic. States are racking up massive budget deficits, and looking for ways to get back to even in any way possible. Legalizing marijuana is one of the easiest ways for governments to meaningfully increase tax revenues.

To double click into this market opportunity, our analysts discussed (in our Cannabis Industry Growth Thesis Note, published on 3/16/2021) Colorado as a watermark for the growth opportunity. Marijuana sales in Colorado alone were $2.2 billion (representing 13% of total US sales) last year. And while Colorado is the domestic leader in Cannabis sales, we point to Colorado’s proportion of cannabis sales to the country’s cannabis sales as an optimistic forward looking indicator for the cannabis industry. This is because Colorado’s output on all other goods only accounts for 1.3% of total US GDP (substantially less than their 13% of total US cannabis revenue number). We believe that over time, Colorado’s cannabis sales as a percentage of total US cannabis sales will decrease, as other states inflate the total US cannabis revenues. Even if Colorado’s cannabis related revenue is just double its normal US GDP ratio (which would bring its percentage down from 13% to 2.6%), we are still looking at a 5X increase in the size of the total market.

Needless to say, we are very bullish about the cannabis industry as a whole. Oftentimes, when we see massive TAM (Total Addressable Market) opportunities, we believe it’s prudent to invest in the best in breed, blue-chip companies in the space. This is why we’re drawn to Canopy Growth Company (CGC).

🚀 Know The Company:

CGC is one of the global leaders in cannabis, and one of the 3 largest publicly traded pure Cannabis stocks in the world, with a market cap of nearly $12 billion. CGC is also a major beneficiary of the first-mover advantage. CGC’s projected $450 million in fiscal 2021 revenues is greater than any other company’s in this industry. CGC has built up a strong portfolio of brands under the Canopy umbrella. These brands have gained a loyal, repeat customer base including Martha Stewart brand, the SurityPro brand, the Tweed brand, and the Biosteel brand. Plus, the company has distribution agreements all across Canada, the U.S., and Europe, giving these ultra-popular brands a strong distribution network

There are a few additional key drivers for CGC’s growth which our analysts view as additional growth levers for the stock. For one, Canopy has also done a great job of strategically growing through M&A, particularly in its 2019 acquisition of Acreage Holdings, a U.S. cannabis company. We believe this gives CGC best in class balance between Canada, where the cannabis market is more mature, and the US, where the cannabis market is in its infancy. Also, household name Constellation Brands, the global spirits producer, made a strategic $5B investment in the company in 2018. Constellation owns 37% stake in Canopy, which should help CGC to weather any liquidity issues, as CGC is incentivized to invest in Canopy’s business. This also offers a compelling long term opportunity for cannabis infused drinks, as Constellation owns some of the largest alcoholic beverage brands in the world, including Corona, Modelo and Svedka.

Conclusion:

Overall, we see CGC as being a long-term beneficiary of a world where cannabis becomes increasingly legalized. We like taking a best in class approach when the TAM opportunity is this big, and are initiating an overweight rating with a $39 price target, and 1 year time horizon.