News that Martha Stuart invested in Canadian cannabis firm Canopy Growth (NYSE:CGC) did not move Canopy Growth stock by much but it does signal something positive. The public is gaining a greater awareness for the prospects of CBD (cannabis and cannabinol) products.
Even though Stuart’s interest in CBD is for treating stressed animals, which is a small market, any positive mention for CBD will increase the addressable market. And the bigger the market gets, the higher the sales potential for companies like Canopy Growth. So, as an investor, should you follow Martha Stuart’s CGC stock trade?
In the United States, the CBD market could reach $20 billion by 2024. And at a market capitalization of $10.44 billion (based on Canopy Growth trading at $44.99 recently), markets are far too optimistic in projecting that Canopy would win much of that market.
Martha Stuart’s interest in CBD could lead to companies studying its potential benefits for animals. Still, the CBD market for animals is tiny. In 2017, just $7 million in cannabis-based products for pets were sold in California, Colorado, Oregon and Washington. The CBD market will need more companies dedicated to researching its potency in animals if the market is to expand.
Canopy Growth Stock and Acquisitions
CGC stock bottomed at around $40 in April only to rebound when the TSX added it to the S&P/TSX 60 index on Apr. 12. Since then, Canopy said on April 16 that it invested in High Beauty. It bought $2.5 million worth of shares, giving the company an 18.4% in High Beauty. The investment suits Canopy because the beauty industry benefits from the anti-inflammatory aspects from CBD. Cannabinoids could help the health industry treat rosacea, eczema, redness of the skin, and aging.
Canopy also said that it completed its acquisition of Spain-based licensed cannabis producer Cáñamo y Fibras. Together with Constellation Brands (NYSE:STZ), the pair may continue its global expansion plans. With $4 billion of Constellation’s investment, Canopy has plenty of cash available to acquire companies in new geographies like Europe.
On April 18, Canopy announced an even bigger deal yet. It would acquire U.S. firm Acreage Holdings for $3.4 billion. Acreage Holdings has 87 dispensaries and 22 cultivation and processing sites across 20 States. This is a win-win deal for both firms as IP sharing and licensing brands will accelerate the growth for Canopy Growth.
The Acreage deal is a potential risk for Canopy in the mid-term. If the U.S. Federal government does not legalize cannabis, realizing the production potential from Acreage and all the brand and IP value will get delayed.
Canopy may wait for the U.S. market to look favorably to cannabis. It could still develop the product and expand the brand in markets outside the U.S. The only near-term downside is that the U.S. is a massive market whose growth potential is highest.
Cronos Earnings and Canopy Growth Stock
On May 9, Cronos (NASDAQ:CRON) reported first-quarter revenue that missed expectations. Though revenue grew an impressive CAD $6.5 million (USD $4.8 million), Cronos has a $2.8 billion market cap, based on its recent share price of $16.13.
And because CRON stock is still a clear speculative play, weak quarterly reports may take the sine of CGC stock as well. Fundamentally, Altria’s (NYSE:MO) CAD $2.4 billion (USD $1.8 billion) investment in Cronos will give the firm years of liquidity. It also gives Cronos the firepower to acquire companies that Canopy may be interested in.
The Bottom Line on Canopy Growth Stock
On Wall Street, 12 analysts covering Canopy Growth stock are very bullish. The average price target of $60 a share suggests that the stock could rise another 33%. Analysts do not have any fundamental numbers to back the stock’s value.
Still, Canopy needs to show investors that its acquisitions are leading to new product development that competitors cannot offer, too. The company is likely years away from profitability but with its cash on hand, it will not go away, either.
Investors need not follow Martha Stewart on the Canopy trade and need only look at the company’s positive prospects set for the long-term.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.