Leading Canadian cannabis producer Canopy Growth (NYSE:CGC) has been on a roller-coaster ride over the past few years, with CGC stock rallying from $10 to $50, before falling all the way back to $10, only to slightly recover to levels around $20.
But it increasingly appears that this roller coaster is due for a huge leg-up over the next few months, and that now is the perfect time to buy CGC stock.
Here are four reasons why:
- The fundamentals in the legal Canadian cannabis market are starting to meaningfully improve to a point where big growth is sustainable over the next few years.
- Canopy Growth is successfully transitioning from “growing fast” to “growing smart,” a pivot which will ultimately improve profitability and boost the stock.
- Canopy Growth is in the early stages of penetrating the U.S. cannabis market, and successful ramp of the company’s U.S. business over the next few quarters and years will add a lot of firepower to the company’s growth narrative.
- As the optics surrounding Canopy Growth improve over the next few quarters, investors will turn their eyes towards the fundamentals, which support a price tag for CGC stock up above $30.
Canadian Fundamentals Improving
As one of the first countries to fully legalize recreational marijuana, Canada was due for some operational hiccups in 2018 and 2019.
Of note, strict regulations largely limited the number of cannabis retail store openings, leading to a significant shortage of places where consumers could actually buy marijuana. Concurrently, the market suffered from a lack of options, as things like cannabis edibles, vapes and drinks were not available for purchase when the market first legalized.
Both of these shortcomings have been addressed in 2020.
Most of Canada is gradually moving towards an open store licensing process, which will remove a cap on the number of private cannabis stores that can be open. At the same time, the legal market has introduced a slew of cannabis alternatives in 2020, including edibles, vapes and drinks.
These changes create a foundation upon which the legal Canadian cannabis market can now sustain big growth over the next few years.
As the Canadian market does sustain big growth going forward, this will create a rising tide which will lift all boats in the market, CGC stock included.
CGC Stock Is Growing Smart, Finally
Canopy has a new management team which is taking all the right steps to position Canopy for profitable, long-term growth.
Specifically, management is reducing Canopy’s global reach in an effort to streamline geographic focus in America, Germany and Canada — the three biggest and most developed commercial cannabis markets. The company is also curbing production, downsizing the product portfolio and pivoting toward a data-driven, consumer-first model.
In other words, Canopy is going from “growing faster” to “growing smarter.”
Naturally, that transition is weighing on near-term growth. But it also positions the company to launch better products, grow margins and expand its dominance in the world’s most important cannabis markets over the next few years.
In the big picture, then, Canopy is finally doing everything right to guarantee itself a bright (and profitable) future in the global cannabis market.
U.S. Growth Is Coming Soon
Canopy Growth has long held out on entering the U.S. cannabis market until marijuana becomes federally legal.
But, in late 2019, the company broke its own rule, and launched a line of hemp-derived CBD products like soft gels, oil drops and creams under the First & Free brand in the U.S.
In other words, U.S. revenue should start to show up for the first time on Canopy’s income statement in 2020.
That’s a big deal, since the U.S. is Goliath and Canada is David when it comes to cannabis. Specifically, U.S. legal spending on cannabis measured more than $12 billion in 2019, while Canada legal spending on cannabis was less than $2 billion.
To that end, it is critical for Canopy Growth to gain exposure to the U.S. cannabis market. Now, they’ve finally done that.
I expect the U.S. business to significantly ramp over the next few years, boosted by potential federal legalization in 2021 or 2022, and for investors to grow increasingly bullish on Canopy’s global growth prospects as its U.S. business starts to gain traction.
Against that backdrop, CGC stock should move higher.
Canopy Growth Stock to $30?
Given the aforementioned points — improving Canadian market growth prospects, a pivot towards higher-margin growth and entry into the U.S. market — it’s easy to see that the optics surrounding Canopy Growth will dramatically improve over the next few quarters.
As they do, investors will start to turn their eyes towards the fundamentals.
Those fundamentals support a price tag for CGC stock around $40.
Canopy Growth is the biggest, deepest pocketed, most well-equipped player in the cannabis market. They reasonably project to be the Altria (NYSE:MO) or Anheuser-Busch (NYSE:BUD) of this space. 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 $6.5 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
CGC stock has been on a bumpy ride over the past few years. While this chop is entirely expected from a new, hyper-growth company in a new, hyper-growth market, it increasingly appears that this chop is going to end soon.
What comes next? Secular growth. Thanks to improving Canadian market fundamentals, a pivot towards higher-margin growth at the company, and entry into the U.S. market, CGC stock looks ready for a sustainable move higher.
And, because of that, now is the perfect time to buy CGC stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long CGC.