Canopy Growth (NYSE:CGC) has bounced back by 16.3% so far in September after a brutal sell-off over the past few months. I recommended Canopy Growth stock back on Au. 30. I felt the stock had been oversold given how little its fundamental picture has changed.
A brand new report on Canadian cannabis market share seems to confirm the idea that Canopy is dominating the nascent Canadian market. Experienced investors know a first-mover advantage is extremely valuable in the long-term.
One of the biggest reasons why CGC stock has dropped in the past few months is because its losses have been heavier than expected. However, the early market share numbers suggest Canopy’s strategy of aggressively investing in ramping up its business is already paying off.
The Numbers
Bank of America found Canopy has a 25% market share of all cannabis listings in Canada. The study included 1,980 listings, 101 brands and 39 different cannabis producers.
Canopy Growth Corp has the largest share of the Canadian market by a long shot. Analyst Christopher Carey says Canopy’s market share is roughly double the 13% market share of its closest competitors, Aurora Cannabis (NYSE:ACB) and Organigram (NASDAQ:OGI).
Carey says establishing that first-mover advantage is critical.
“Establishing distribution – early and big – can be significant in creating long-term market share moats for a business competing in new consumer categories prone to fragmentation,” he said.
Unfortunately, the market share study wasn’t all good news for Canopy Growth stock. The 25% “share of listings” represents product already on shelves throughout Canada. Bank of America also looked at “sell-in,” or total retail purchases of cannabis. Sell-in represents the future share of listings. In that statistic, Canopy has dropped to second place with 22%, trailing Aurora at 27%.
The Future of Cannabis
Carey says investors shouldn’t get too worried about Canopy losing sell-in share. In the June quarter, Canopy’s harvest jumped 183% quarter-over-quarter, much of which was hot-selling THC flower.
Carey is expecting this spike in harvest will translate to a 33% quarterly increase in Canopy sell-in in the fiscal second quarter of 2020. That big push could push Canopy back ahead of Aurora in sell-in share.
Obviously having that top market share spot is ideal, but as long as Canopy remains at or near the top, investors should be rewarded in time. Certainly, investors want Canopy Growth to be the Coca-Cola (NYSE: KO) of cannabis, but it will be just fine if Canopy Growth stock ends up the PepsiCo (NASDAQ: PEP) of Canadian cannabis.
In fact, PEP stock has generated a total return of more than 2,630% over the past 30 years. KO stock has a total return of 2,570% in that time.
How to Play Canopy Growth Stock
The latest Canadian market share numbers were certainly good enough to keep Carey in the bull camp when it comes to CGC stock.
“Canopy remains a company, if a still imperfect story, with a chance at becoming a leading global player in cannabis, especially given its industry leading [balance] sheet and partnership,” he said.
Bank of America has a “buy” rating and $27.66 price target for Canopy Growth stock.
If you are a cannabis investor that believes the industry is just getting started, I think you can’t go wrong owning Canopy Growth stock. My only recommendation would be to hedge your bets by owning ACB stock and at least two or three other cannabis stocks as well.
As much as you love Canopy Growth stock and think Canopy will end up as the Coke or Pepsi of cannabis, it is still extremely early in the cannabis game. Especially in the event of U.S. legalization, there will be plenty of demand to support multiple market winners.
It’s likely most of the smaller names can’t beat out Canopy Growth Corp and Aurora directly. But they might make appealing buyout targets down the line.
I would recommend all cannabis investors buy Canopy Growth stock, ACB stock and at least two more of their favorite cannabis plays for a more diversified approach to the market.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
