Canopy Growth (NYSE:CGC) has been — to be frank — a disappointment to CGC stock holders for several years.
This company was supposed to turn into a titan of industry in the booming global cannabis market, with surging revenues, huge profits and a soaring stock price.
But none of that has happened. Yet. Mostly because the cannabis industry has gotten off to a slow start, Canopy has struggled to profitably grow in this sluggish market and shareholders have lost their patience.
But… there’s reason to believe that Canopy Growth is on the cusp of a tipping point, wherein the company will finally turn into a rapidly growing, profitable giant in the booming cannabis space.
And, as that happens, CGC could surge all the way to $60 — imply 300% upside potential.
Here’s how that could happen.
The Cannabis Market Boom is Inevitable
It’s important to understand that the global emergence of a burgeoning and huge legal cannabis market isn’t a matter of “if”, but rather a matter of “when”.
There is simply too much demand for cannabis out there in the world, too much support for legalization and too much science showing the drug’s wide-ranging benefits to stop legal cannabis from becoming a ubiquitous global reality within the next decade.
Just look at young consumers, who increasingly like to smoke weed more than they like to drink alcohol (importantly, those young consumers are only gaining more and more purchasing power, and therefore, becoming more and more influential in the global economy).
Or look at Pew polling trends, which show that the percentage of Americans who support nationwide legalization has steadily risen from ~30% in the 1990s to nearly 70% today.
Or look at the latest academic research, which continues to show that the one taboo drug actually has a wide array of both direct and indirect benefits.
The global legalization and de-stigmatization of cannabis is coming, and when it does arrive, the global legal cannabis market will be huge, thanks to robust demand for the drug.
In this sense, the only question is: when will this happen? And what does it mean for Canopy Growth stock?
That Boom is Starting Now
There’s reason to believe that the global cannabis boom started in 2020.
Everyone looks to Canada as the pioneer of the global cannabis legalization and de-stigmatization trend. Rightly so. They are basically the first developed country to nationally legalize cannabis.
In Canada, the cannabis market got off to a rough start in 2018 and 2019 because, quite frankly, nobody knew what they were doing. Canadian government officials didn’t know to regulate the industry. Cannabis sellers didn’t know how much product to make, or where to sell it. Buyers didn’t know where to buy the product.
It was a mess.
But, in 2020, that mess is getting cleaned up. Government officials have relaxed tight restrictions, and the number of cannabis retail store openings in Canada is booming. Producers have right-sized their supply to match demand, and are getting that supply into the right channels now. Consumers are getting more and more comfortable with the legal model, and legal sales in Canada are hitting new record highs.
In other words, Canada is finally figuring out how to turn robust demand for cannabis, into a booming market.
The rest of the world will follow that blueprint. Over the next decade, more and more countries will legalize cannabis, sales globally will boom, and the massive cannabis wave that we were all expecting back in 2018, will finally arrive in the early 2020s.
Of course, that’s great news for Canopy stock.
CGC Stock has Huge Upside Potential
Canopy Growth has enormous upside potential as the global cannabis market finally comes into its own.
Looking at the big picture here, I see five things happening with respect to Canopy Growth over the next few years:
- Rising consumer demand for alternative recreational drugs — like cannabis — coupled with supportive legislation will power huge growth in the global cannabis market over the next 5 to 10 years, leading to this market measuring $40+ billion by 2024, and potentially $60+ billion by 2030.
- Canopy Growth continues to leverage its bigger-than-peer production facilities, first-mover’s advantage, strong product line-up and even stronger partnerships to sustain leadership in this $60+ billion global cannabis market at scale. Something like 10% market share seems doable, implying $6+ billion in sales by the end of the decade.
- Economies of scale push gross margins up towards 50%, roughly where they sit in the alcoholic beverage industry today.
- Management’s commitment to cost-cutting results in continued positive operating leverage and opex rate compression to 30%. On 50% gross margins, that implies 20% operating margins, which is also consistent with the alcoholic beverage industry.
Assuming those things happen, my modeling suggests that Canopy has a visible opportunity to net $3 in earnings per share by 2030.
Based on a 20-times forward earnings multiple, that implies a 2029 price target for CGC of $60.
Bottom Line on CGC
It’s time to buy Canopy Growth stock.
The long overdue cannabis market boom will start to materialize in the early 2020s. As it does, Canopy Growth’s sales figures will head sharply higher. This topline growth acceleration will couple with disciplined expense management to spark enormous profit growth. Enormous profit growth will converge on today’s depressed CGC stock price and power huge share price gains.
So buy Canopy today. There’s huge upside potential in this name over the next few years.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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