Canopy Growth Corp: Consider a Solid Pot Stock on the Cheap?

Looking for Pot Stocks? Read This

Unless you’ve been living under a rock, you’ve probably heard about the sell-off that’s going on in the U.S. stock market. With a massive tumble across industries, almost every ticker is deep in the doldrums.

While shareholders don’t like market downturns, the latest correction could be an opportunity for value-conscious investors, especially those who have been eyeing the cannabis industry.

You see, over the past few years, pot stocks have been getting a lot of investor attention. Because the market is still at a nascent stage and expanding, many cannabis companies have been growing at a rapid pace.

Investors want a piece of the action, but not everyone has taken action. One of the main concerns that made people think twice about getting into pot stocks was that valuations seemed a bit high.

Now with a market downturn, the share prices of pot companies have come down quite a bit. And even the most strong pot stocks seem to be offering discounts.

Case in point: Canopy Growth Corp (NYSE:CGC) is one of the biggest players in the cannabis industry. The company offers a wide range of brands and products in dried flower, oil, and softgel capsule forms. It’s also developing edibles and beverages.

CGC is also in the cannabis medical device business through its subsidiary Storz & Bickel GmbH & Co. KG.

Notably, Canopy Growth is one of the few pot stocks listed on the New York Stock Exchange (the company also trades on the Toronto Stock Exchange). In an era when many pot stocks are still trading over the counter in the U.S., having its shares listed on a major American stock exchange can bring the company a lot more liquidity and exposure.

As I mentioned earlier, the stock market is having a correction. And despite being an industry heavyweight, Canopy Growth stock has been heavily sold off. Does that mean it’s a good time to consider this pot stock?

Well, Mr. Market is highly unpredictable. But if you take a look at the fundamentals, you’ll see that Canopy Growth is still one of the most solid companies in the legal cannabis industry.

Canopy Growth Corp Runs a Solid Business

One of the major catalysts for the pot industry was Canada’s nationwide legalization. On October 17, 2018, Canada legalized recreational marijuana, making it the first G7 country to do so.

Canopy Growth was right there to capitalize on that new market. According to the company’s latest investor presentation, it has an estimated 22% share in the retail Canadian recreational cannabis market, making it the leader of the industry. (Source: “Investor Presentation March 2020,” Canopy Growth Corp, last accessed March 13, 2020.)

Notably, the company has a 23% market share in Ontario (Canada’s most populous province), a 21% market share in Nova Scotia, a 35% market share in Prince Edward Island, and a whopping 38% market share in Alberta.

The company also serves the medical cannabis market and has grown its number of patients to over 76,700 in Canada. (Source: “Canopy Growth Reports Third Quarter Fiscal 2020 Financial Results,” Canopy Growth Corp, February 14, 2020.)

Thanks to the changing regulatory environment, Canopy Growth now has a much more diverse revenue mix than before.

Two years ago, the company generated all its gross revenue from the Canadian medical marijuana market. In the company’s most recent reporting quarter, Canadian medical pot represented just 11% of CGC’s gross revenue.

The company earned 51% of its gross revenue from the Canadian recreational pot business, 14% from its international medical pot business, and 24% from its strategic acquisitions.

And now, with more product forms, the cannabis industry could attract new recreational customers.

You see, in the U.S., dried flower used to be the go-to choice for consumers, accounting for 65% of the industry’s total sales in 2015. Fast forward to 2019 and dried flower’s market share dropped to 42%, with the remaining 58% of cannabis sales coming from edibles, vapes, pre-rolls, and other form factors. (Source: “Investor Presentation March 2020,” Canopy Growth Corp, op. cit.)

Meanwhile, survey results suggest than more than one in four people in Canada intend to use cannabis beverages.

With these trends, Canopy Growth is well positioned to keep growing its business. The best part is, as one of the most established players in the legal cannabis industry, the company is already churning out some serious numbers.

In the third quarter of Canopy Growth Corp’s fiscal year 2020, which ended December 31, 2019, the company generated CA$123.8 million of net revenue. The amount represented a whopping 62% increase from the second fiscal quarter. (Source: Canopy Growth Corp, February 14, 2020, op. cit.)

For the reporting quarter, Canopy Growth’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss was CA$91.7 million. While that was still a loss, it was substantially narrower than the company’s adjusted EBITDA loss of CA$155.7 million incurred in the prior fiscal quarter.

The improvement was due to higher sales and gross margins, as well as lower operating expenses.

Looking ahead, management expects Canopy Growth to start generating positive quarterly adjusted EBITDA by the fourth quarter of fiscal 2022, and positive net income within fiscal 2023 to 2025.

Canopy Growth Corp Net Revenue Growth (CA$Millions)

(Source: Canopy Growth Corp, February 14, 2020, op. cit.)

Analyst Take

And there you have it. If investor sentiment continues to be bearish toward U.S. equities, it’s likely that most pot stocks will be trading at a subdued level.

But if things get better, the strong fundamentals of Canopy Growth Corp should help it regain its investor appeal.