Canopy Growth Corp: A Top Pot Stock for 2021 & Beyond

Pot Stocks Getting Renewed Investor Attention

Pot stocks are making a comeback. In fact, they’ve been some of the biggest winners since the U.S. presidential election on November 3. The prospects of a Democratic presidency has boosted the investor appeal of a bunch of pot companies.

But if you’e looking for a pot stock to invest in for the long term—as opposed to trading the current swing—there’s one company that simply cannot be ignored: Canopy Growth Corp (NASDAQ:CGC).

Canopy Growth is a leading cannabis and cannabinoid-based consumer product company headquartered in Smith Falls, ON, Canada. It offers a wide range of products, such as dried flower, oil, softgel capsules, infused beverages, topicals, edibles, and vaporizer devices.

While Canopy Growth stock is a Canadian pot stock, it has built an international presence. For instance, in the U.S., the company launched Martha Stewart-branded health and wellness cannabidiol (CBD) gummies, oil, and soft gels in September 2020. Meanwhile, it has the No. 1 market share in Germany’s dried flower cannabis market. (Source: “Canopy Growth Q2 2021 Earnings Presentation,” Canopy Growth Corp, November 9, 2020.)

Canopy Growth made headlines for the entire cannabis industry in 2018, when it received a $4.0-billion investment from Constellation Brands, Inc. (NYSE:STZ). Constellation Brands is a major producer and marketer of beer, wine, and spirits. It has a huge brand portfolio that includes “Corona,” “Modelo,” and “SVEDKA.”

Earlier this year, Constellation Brands increased its stake in Canopy Growth to 38.6%. (Source: “Constellation Brands Exercises Warrants to Acquire Shares in Canopy Growth, Reinforcing Confidence in Canopy Growth’s Ability to Win Long-Term in Emerging Cannabis Industry,” Canopy Growth Corp, May 1, 2020.)

The partnership has many benefits to CGC stock. For instance, it improved the pot company’s balance sheet and access to banking.

Moreover, Canopy Growth can leverage the alcoholic beverage company’s powerful distributor network and key account relationships. Notably, Canopy Growth’s “BioSteel” nutrition product line recently signed distribution agreements with Reyes Beer Division, Manhattan Beer, and other partners in Constellation Brands’ distribution network.

Canopy Growth is well positioned for the future because of the tailwinds in its key operating markets.

In Canada, the total addressable market for retail cannabis sales is expected to quadruple from 2019 to 2023. In Germany, retail pot sales are expected to increase tenfold during the same period. In the U.S., the total addressable market for CBD products is projected to increase sixfold between 2019 and 2023. (Source: “Cowen 2020 Cannabis Conference,” Canopy Growth Corp, November 30, 2020.)

Canopy Growth Corp Delivers Growing Financials

As one of the best-known pot stocks on the market, Canopy Growth stock does not disappoint in terms of financial growth.

In the second quarter of the company’s fiscal year 2021, which ended September 30, 2020, it generated CA$135.3 million in total revenue, which represented a 77% increase year-over-year. Gross margin came in at 19%, up 1,400 basis points from the five-percent gross margin reported for the year-ago period. (Source: “Canopy Growth Reports Second Quarter Fiscal 2021 Financial Results,” Canopy Growth Corp, November 9, 2020.)

The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss was CA$85.7 million. While the number is still negative, it marked a substantial improvement from the adjusted EBITDA loss of CA$150.4 million incurred in the prior-year quarter.

During the second quarter, Canopy Growth’s Canadian recreational pot business—the company’s biggest segment—achieved 178% revenue growth. Its Canadian medical marijuana business also improved its revenue by seven percent year-over-year. Canopy Growth’s international medical marijuana revenue, on the other hand, slipped three percent.

The company has a strong cash position. At the end of September, Canopy Growth had more than CA$1.7 billion in cash and short-term investments.

In the company’s earnings conference call, the chief financial officer, Mike Lee, said,

…momentum is building across our key businesses as our new strategy is coming to life. And we are seeing strong growth in our Canadian rec cannabis business with our improved market share. And our U.S. business is evolving as we build a diversified ecosystem that has multiple routes to market and many ways to win in the U.S. And finally, we are doing this while also maintaining our financial discipline.

(Source: “Canopy Growth Corporation (CGC) CEO David Klein on Q2 2021 Results – Earnings Call Transcript,” Seeking Alpha, November 9, 2020.)

Looking ahead, Canopy Growth expects continued growth in its Canadian recreational pot business, driven by new store openings and improving market share in dried flower. At the same time, the company’s strategic business units—such as the BioSteel sports nutrition line mentioned earlier—are expected to continue to benefit from expanded distribution channels in the U.S.

One thing investors can look forward to with CGC stock is continued margin expansion. Management has reaffirmed the pot company’s long-term gross margin target of 40%, which is substantially higher than the already much-improved figure of 19% in the second fiscal quarter.

But because savings from Canopy Growth’s strategic initiatives likely won’t start kicking in until its fourth fiscal quarter, gross margin for the third fiscal quarter (which ends this December) is expected to be in the low 20s.

Canopy Growth Corp (NASDAQ:CGC) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Even though Canopy Growth Corp is a Canadian pot company, its shares enjoyed a strong post-election rally, just like those of U.S.-focused cannabis operators. Looking a bit further back, Canopy Growth stock has surged more than 50% over the past six months.

As it stands, Canopy Growth is one of the most established pot stocks on the market. The company is backed by Constellation Brands, it has growing financials and a strong cash position, and it will likely benefit from secular tailwinds in its operating markets.

While there are plenty of other pot stocks with decent growth prospects, CGC stock remains one of the top tickers for long-term investors to consider.