Canopy Growth Corp: A Pot Stock for Long-Term Investors?

Time to Ignore the Noise in Pot Stocks

Remember how I repeatedly warned readers about volatility in pot stocks?

Well, Canopy Growth Corp (NASDAQ:CGC) just proved my point again, even though long-term investors are still laughing all the way to the bank.

Allow me to explain.

Canopy Growth is one of the most prominent names in the legal cannabis industry. In fact, it was the first cannabis producer to be listed on the New York Stock Exchange. In the company’s home country, Canada, Canopy Growth stock trades on the Toronto Stock Exchange under the ticker symbol “WEED.”

Today, Canopy Growth Corp is a diversified cannabis and cannabinoid-based consumer products company. It offers a variety of products, including dried flower, oil, softgel capsules, infused beverages, edibles, topicals, and vaporizer devices.

One of the reasons Canada is home to many pot stocks is that it legalized recreational marijuana nationwide in October 2018. But, of course, that also means competition is intense in the business.

The good news is that, even though many companies want a piece of the pie, Canopy Growth has done a better job at it than most.

According to its latest investor presentation, the company had a 15.7% share of the Canadian recreational cannabis market in the December quarter. (Source: “Canopy Growth Q3 2021 Earnings Presentation,” Canopy Growth Corp, February 9, 2021.)

Notably, Canopy Growth had a 19.2% share in the Canadian recreational marijuana flower market. And in Ontario—Canada’s most populous province—the company’s share of the value recreational marijuana flower market was 16.8%.

Generally speaking, established players in large markets are considered blue-chip companies and tend to be characterized by stable stock price movements. But legal cannabis is still a nascent industry. With all the regulatory uncertainty and media hype, pot stocks can often make large and unexpected moves.

Take a look at the chart below. CGC stock already enjoyed a strong rally from October to December last year. But as we moved into 2021, momentum picked up even more.

Consider this: on the last trading day of 2020, Canopy Growth stock closed at $24.64 per share. On February 10, CGC stock closed at $52.17. That’s a 112% move in less than one and a half months!

But as I’ve said plenty of times before, parabolic runs typically come with abrupt pullbacks. On February 11, Canopy Growth stock tumbled 22.1% to $40.65 per share.

Canopy Growth Corp (NYSE:CGC) Stock Chart

Chart courtesy of StockCharts.com

So, where does that leave us?

Well, speculators can say whatever they want, but in the long run, fundamentals matter. And fundamentally, Canopy Growth offers very strong investment prospects.

The company reported earnings on February 9. The report showed that, in the third quarter of Canopy Growth’s fiscal year 2021, which ended December 31, 2020, it generated CA$152.5 million of net revenue, marking a 23% increase year-over-year. (Source: “Canopy Growth Reports Third Quarter Fiscal 2021 Financial Results,” Canopy Growth Corp, February 9, 2021.)

The more exciting part, though, is what the company plans to do in the next several years.

For instance, Canopy Growth launched “Martha Stewart”-branded health and wellness cannabidiol (CBD) gummies, oil, and softgels in the U.S. in September 2020. Now, with the Joe Biden administration and the increased prospects of full legalization, the company is eyeing the U.S. cannabis market.

“We anticipate that this legislation will include comprehensive reform to ensure restorative justice, protect public health and implement responsible taxation while ending cannabis prohibition,” said Canopy Growth’s chief executive officer, David Klein, in the company’s latest earnings conference call. (Source: “Canopy Growth Corporation (CGC) CEO David Klein on Q3 2021 Results – Earnings Call Transcript,” Seeking Alpha, February 9, 2021.)

“We believe that this legislative package or a combination of reform measures could allow Canopy to enter the US THC market during calendar 2021.”

Financially, management expects Canopy Growth to achieve a compound annual growth rate (CAGR) of 40% to 50% in net revenue from fiscal 2022 to 2024. Moreover, management expects the company to achieve profitability in the second half of fiscal 2022, generate positive operating cash flow in full-year fiscal 2023, and generate positive free cash flow in full-year fiscal 2024.

Analyst Take

Obviously, it’s one thing to set a target; it’s another thing to actually achieve it. Under the changing regulatory environment, the path forward for the cannabis industry is not exactly clear. With increasing competition, not all pot stocks will be winners in the long term.

That said, Canopy Growth Corp has an established market position in Canada, and it has delivered growing financials. If the company successfully breaks into the U.S. market, it will provide long-term investors a good reason to warm up to CGC stock.