Calendar 2019 was a bad, bad year for pot stocks. Everything that could go wrong, did go wrong. Legal market demand in Canada fell flat. Revenue growth rates meaningfully decelerated. Margins were killed by black market competition and aggressive production capacity expansion. Losses widened. Progress on the U.S. market front went nowhere. Executives left in droves. Stock prices across the industry collapsed.
Canopy Growth (NYSE:CGC) — the market’s biggest and most well-known company — was no exception to the trend. Their revenue growth rates fell flat. Their margins were hit hard and their losses widened. Consequently, in 2019, Canopy Growth stock dropped more than 20%.
But, that’s 2019. Now it’s 2020. A whole new year. Does that mean a whole new outlook for CGC stock?
I think so. If 2019 was the year that Canopy Growth lost its “mojo” or momentum, 2020 will be the year that the company gets it back. In the process of getting its mojo back, Canopy Growth stock will roar above $30. Here’s why.
Canopy Growth Will Get Its Mojo Back
Three big catalysts will enable Canopy Growth — and a handful of other pot stocks — to regain momentum in 2020.
First, demand trends in the Canadian market will improve. Such improvements will be a byproduct of a few things: First, there will be more products in the legal channel, including very popular edibles and vape products, as well as more supply of existing products, thanks to huge capacity expansion in 2019 from legal producers like Canopy Growth.
There will be more retail store openings, as Canada is finally realizing that slow retail expansion has been partly to blame for the legal market’s challenges to-date. Legal producers will also have a better handle on distribution and logistics, which will help them better compete with black market sellers.
Second, Canopy Growth will make meaningful inroads in the U.S. market. This breaks into two components. The first component is legislation, and is based on the idea that because the House just passed the MORE act, U.S. federal legalization of cannabis could become a reality in 2020. The second component is pre-legalization expansion, as Canopy just launched First & Free, a line of hemp-derived CBD products, in the U.S. So long as progress is made on both of these fronts in 2020, Canopy Growth’s sales trajectory should improve.
Third, the positioning of CGC stock will allow for good news to have a hugely positive impact on the stock price. That is, in early 2o19, CGC stock was flying higher with a huge valuation, and needed perfect to work. Perfect didn’t happen, so shares collapsed.
Heading into 2020, though, we have an opposite situation. Canopy Growth stock is depressed, beaten up, and trading at a multi-year low valuation. If good news materializes in 2020, then the convergence of good news on a depressed valuation could spark a big rally.
Canopy Growth Stock Will Move Above $30
My modeling suggests that the aforementioned favorable developments will posses enough firepower to drive Canopy Growth stock above $30 in 2020.
An in-depth look at my numbers can be found here. But, to succinctly recap, current consumption trends among younger demographics imply that younger crowds like to smoke/eat/drink cannabis almost as much as they like to drink alcohol. As such, once the cannabis market becomes fully legal — and it will, given consumption trends and shifting government attitudes — it will also become very, very big. Like almost alcohol-big.
The alcoholic beverage market is a trillion dollar-plus market globally. Most estimates peg the global cannabis market as being around $200 billion in size within a decade. Given the aforementioned reasoning, that number seems entirely doable.
Canopy Growth is the biggest, deepest pocketed, most well-equipped player in the space. They reasonably project to be the Altria (NYSE:MO) or Anheuser-Busch (NYSE:BUD) of the cannabis market. Those are $100 billion companies. Canopy may not get that big because the cannabis market won’t be as big as peer tobacco and alcoholic beverage markets. But, it will get very big one day — much bigger than its current $7 billion market cap.
Within this mental framework, my modeling suggests that Canopy Growth will hit roughly $10 billion in sales by 2030, with 30% operating margins, and $5 in earnings per share. 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 $33 to $34.
Bottom Line on CGC Stock
2019 was the year that Canopy Growth lost its “mojo” and Canopy Growth stock tanked. Calendar 2020 will be the exact opposite. Over the next twelve months, Canopy Growth will regain its “mojo” as demand trends in Canada improve and the company makes inroads in the U.S. market. This will power CGC stock back above $30 in 2020.
As of this writing, Luke Lango was long CGC.
