The past two years have been the best of times and the worst of times for Canada’s biggest cannabis producer, Canopy Growth (NYSE:CGC). In 2018, Canopy Growth stock exploded onto the scene as a hugely popular growth company that was a pioneer of the potentially massive legal cannabis market. CGC stock roared from about $20 to roughly $60, thanks to the nationwide legalization of cannabis in Canada as well as a multi-billion dollar investment from alcoholic beverage giant Constellation Brands (NYSE:STZ).`
But 2019 has played out very differently for Canopy Growth stock. Canopy has gone from a hugely popular growth company to a poster child for bubble stocks, as the stock’s stretched valuation has crumbled under the weight of a choppy legal cannabis rollout in Canada, slower-than-expected cannabis legalization elsewhere, and an array of cash burn, margin, and profitability concerns.
Ultimately, CGC stock dropped from a $50-plus high in early May to a sub-$20 price tag in December.
Fortunately for the owners of Canopy Growth stock, 2019 is almost over, and 2020 could usher in a new (and better) era for Canopy Growth. Specifically, there are three reasons to believe that CGC stock will rebound a great deal over the next 12 months. Further, the numbers indicate that if the tide does turn in the near-term, Canopy Growth stock could nearly double.
Three Reasons Why Canopy Growth Can Rebound
First, the conditions of the cannabis market in Canada should improve. Legal fees, distribution hiccups, and supply constraints have killed demand in the legal Canadian cannabis market in 2019. Legal fees will stick around. But distribution hiccups should fade in 2020 as producers gain more experience. Canopy’s supply constraints should also ease, since Canopy has dramatically expanded its capacity and increased its growth potential. The launch of new marijuana products, including vapes, edibles, and beverages, should supercharge demand for legal cannabis in 2020.
Second, the U.S. should make meaningful progress towards cannabis legalization. Canopy has made a big bet on the legalization of cannabis in the U.S. Unfortunately, very little progress was made on that front in 2019. But in November, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. While the vote was not super meaningful by itself, it sets the stage in 2020 for the Senate to pass the MORE Act and make weed completely legal in the U.S.
Third, the positioning of CGC stock has improved in every way. Coming into 2019, Canopy Growth stock was flying high, investors were bullish on it, analysts’ estimates for CGC were being hiked to unreachable levels, and its valuation was at historic highs.
The stock was positioned to crater on bad news. Exiting 2019, CGC stock is crashing to multi-year lows, investor sentiment towards Canopy Growth stock is bearish, Wall Street estimates have tumbled to more beatable levels, and its valuation is as low as it’s been since Canada legalized cannabis. Now CGC stock is positioned to roar on good news.
Canopy Growth Stock Could Double in 2020
Canopy Growth’s long-term profit outlook indicates that CGC stock should trade around $34 in 2020. So if the Street becomes more upbeat on Canopy Growth stock, then the shares could nearly double over the next 12 months.
My estimates, based on market data from BDS Analytics, estimate Canopy Growth’s share of the legal global cannabis market at just under 2% in 2019. But CGC has a minimal presence outside of Canada, and zero presence in the world’s biggest market, the U.S. The legal global cannabis market is projected to grow at a nearly 25% annualized clip to $32 billion by 2022. Yet most market research firms peg the global addressable market for cannabis at somewhere north of $200 billion.
Thus, the legal cannabis market will keep growing at a robust rate into 2030. Realistically, I think the market will increase about 15% per year to over $90 billion by 2030. Canopy should control about 10% of that market, with expansion in the U.S. market accounting for the bulk of its market share gains. If CGC reaches that plateau, its 2030 sales will be about $9 billion-plus.
At the same time, its gross margins should improve as demand for its products ramps up and black market competition eases. Sustained high revenue growth will increase its profitability. Its profit margins should ultimately be very impressive, reaching levels similar to those of the tobacco and alcoholic beverage industries.
Putting all that together, I estimate that Canopy’s earnings per share could reach $5 by 2030. Based on a forward earnings multiple of 16, which is average for the market, that yields a $100 price target for CGC stock by 2029. Discounted back by 10% per year, that equates to a 2020 price target of about $34.
The Bottom Line on CGC Stock
As we head into the final month of what has been a disastrous year for Canopy Growth stock, there’s reason to be cautiously optimistic that the shares will rebound tremendously in 2020. Those who buy CGC below the $20 level should be rewarded handsomely in the long-run.
As of this writing, Luke Lango was long CGC.
