Most stocks have rallied in early 2019: The S&P 500 is up 6.5% year-to-date. But few stocks have been as hot as Canadian cannabis producer Canopy Growth (NYSE:CGC). In a span of just over three weeks, CGC stock is up more than 75%, thanks to multiple positive developments in the Canopy narrative which have reinvigorated investor enthusiasm.
After such a huge rally, there are naturally a plethora of questions. Is the rally in CGC stock legit? Is it sustainable? Can Canopy Growth stock head higher? Will it drop back to $30 just as quickly as it did last time?
In the big picture, the answers to all these questions can be summed up in a few sentences.
Canopy Growth is the leading player with unparalleled resources and capacity in the rapidly growing and soon-to-be-enormous global cannabis market. The valuation is big (it’s a $15 billion company today), but the opportunity is far bigger (this could be a $100 billion company in a decade). Yes, CGC stock is technically overbought in the near term, so investors should tread carefully on the heels of a 75% rally in three weeks. But, this stock will ultimately head way higher in a long-term window, so long=term investors should embrace the 2019 strength in CGC stock.
All in all, this is a long-term winner that needs a near-term pullback. Trimming here isn’t a bad idea. Buying the next dip is a better one.
Canopy Has Separated Itself From The Pack
By now, it has become crystal clear that Canopy Growth is the second-to-none public leader in the global cannabis space.
Signs of this leadership have been around for several quarters. Canopy has always been the sales leader in this market, with the biggest growing capacity, arguably most robust portfolio of cannabis-based products, and the widest global distribution reach. But, the global cannabis market was still in its infancy, so not everyone was convinced this leadership would persist ten-plus years down the road.
Then, leading alcoholic beverage company Constellation Brands (NYSE:STZ) poured $4 billion into Canopy Growth in a vote of confidence that Canopy’s cannabis leadership would persist for a lot longer. That convinced a lot of people that CGC stock was a winner. But, supply issues following the nationwide legalization of cannabis in Canada coupled with broader macroeconomic slowdown concerns made investors forget about that $4 billion investment, and the market once again turned skeptical.
Then, Canopy won a license to process and produce hemp in the state of New York, becoming the first Canadian cannabis company with official CBD-related operations in the U.S.
Now, the skeptics are believers.
And how could they not be? After all, over the past year, Canopy has maintained sales leadership in the nascent cannabis market, developed robust global distribution, won a $4 billion investment from a $30 billion alcoholic beverage company, and become the first Canadian cannabis company to make an aggressive move in the U.S. market.
Clearly, Canopy has separated itself from the rest of the pack in the cannabis industry. This separation will ultimately allow CGC stock to keep rallying in 2019.
Analyst Upgrades Will Keep Rolling In Throughout 2019
Mainstream Wall Street analysts were afraid to cover the cannabis industry in 2018. Pot stocks were highly volatile, jumping up big one day and dropping huge the next. The fundamentals were shaky, and the outlook was hazy. As such, analysts didn’t want to touch marijuana stocks. And they didn’t.
That is changing in 2019.
In early 2019, Cowen’s Vivien Azer said the cannabis market would be worth $80 billion in the U.S. in 11 years, and highlighted CGC stock as a potential out-performer in 2019. Shortly thereafter, Piper Jaffray launched coverage on pot stocks, with a Buy rating and $40 price target on CGC stock. Less than three weeks later, following Canopy’s entry into the U.S. market, Piper Jaffray raised its price target on CGC stock to $60.
In other words, mainstream Wall Street analysts are starting to take a serious look at the cannabis industry, and consensus takeaway is simple: the marijuana industry will be huge, and CGC stock is the top pick.
This pattern will persist throughout 2019. The larger the cannabis market gets — and the more companies start to penetrate the ultra valuable U.S. market — the more Wall Street analysts will start to cover the whole industry. To those analysts, Canopy Growth will seem like the clear and obvious winner in the space, so they will launch Buy ratings on CGC stock with big price targets. That will boost investor enthusiasm, keep selling muted, and push CGC stock higher.
All in all, persistent analyst upgrades should keep CGC stock on an uptrend in 2019.
Canopy Growth Could Be a $100 Billion Company
My long-term bull thesis on CGC stock is quite simple.
Given that teens smoke weed as much or more than they drink alcohol, and given the massive amounts of research coming out regarding the multi-faceted benefits of CBD, I think the global cannabis market will easily one day be as large as the global alcoholic beverage market. Thus, the global cannabis space is a $1 trillion-plus industry in the making. Canopy will be a leader in this space, somewhat like the Altria (NYSE:MO) or Anheuser-Busch (NYSE:BUD) of CBD.
Thus, at scale, I see Canopy doing about $25 billion in revenue on 30% operating margins. That level of output seems achievable within the next decade. Taking out 20% for taxes, I think Canopy can do about $6 billion in net profits in ten years. Based on a market average 16x multiple, that equates to a long-term valuation target of nearly $100 billion, versus just $15 billion today.
Bottom Line on CGC Stock
CGC stock is a long term winner that is technically overbought in the near term. There will likely be a near term pullback, so trimming here isn’t a bad idea. But, this is a potential $100 billion company in the making, so buying the next dip is an even better idea.
As of this writing, Luke Lango was long CGC.