Canopy Growth Corporation (NYSE:CGC) stock touched a high of $52.03 towards the end of April 2019. The stock currently trades 50% lower at $31.18. Canopy Growth stock is no exception as the cannabis industry stocks have been battered recently.
I recently discussed Hexo (NYSE:HEXO), where I elaborated on the industry concerns. Those concerns remain the dominant factor that translate into depressed stock prices we see today.
However, I am of the opinion that Canopy Growth stock is attractive after a steep correction. This article will discuss the factors that make me bullish on the stock.
Canopy Growth on a Shopping Spree
As of March 2019, Canopy Growth had cash and equivalents of nearly C$4.5 billion. This provides Canopy Growth with ample financial flexibility.
The company has been aggressive on the inorganic growth front through 2019. This includes acquisition of This Works, KeyLeaf Life Sciences, Acreage Holdings (OTCMKTS:ACRGF), and Cafina, among others.
The company’s inorganic growth strategy is likely to translate into a wider geographic presence coupled with sustained growth in revenue. Cash burn remains a concern, but I believe that growth and innovation will offset the concern.
To elaborate, the acquisition of Cafina gives Canopy Growth access to Spain. The company already has a presence in Germany, Denmark, the United Kingdom, Czech Republic, and Poland. Over the next five years, Europe is set to become the biggest market for cannabis in the world.
Therefore, Canopy Growth is moving in the right direction with significant inroads in the region. Besides the European region, CGC has presence in South America, Africa, and Australia.
It is worth noting that Canopy Growth already has 90 patents with more than 240 patents being filed. I believe that aggressive market expansion coupled with focus on innovation is a deadly growth combination.
Going forward, the overcrowded space of cannabis producers will witness consolidation and it seems likely that Canopy Growth will acquire, survive, and grow.
Recreational Products to Boost CGC Stock Margin
With high inventory levels, the price of dry cannabis is likely to trend lower in the coming quarters. This will put pressure on the margins and impact the prospects of operating cash flow turning positive.
However, I believe that the launch of consumer recreational products in fiscal 2020 is likely to be the game changer for Canopy Growth stock.
The products include vape oils, edibles, and beverages. In particular, the company is bullish on beverages that can potentially serve as an alternative to alcohol.
While I am not expecting exponential growth in this segment, it will gradually help Canopy Growth improve on the margins. With presence in several countries, CGC stock is likely to have a wide market launch of consumer recreational products. Market response to these products will be a key trigger for CGC stock movement.
Canopy Growth Stock’s Stellar Growth Trajectory
Canopy Growth has witnessed a robust jump in revenue and the amount of cannabis sold. While the company is still burning cash, I don’t see that as a worry for an industry that is still at an early growth stage.
For the forth quarter of 2019 (4Q19), Canopy Growth reported revenue of C$94.0 million as compared to 4Q18 revenue of C$22.8 million. This implies a 312% surge in revenue. The amount of cannabis sold also surged from 2,528 kg to 9,326 kg for the same period.
The surge in revenue underscores the point that Canopy Growth has been able to reach businesses and consumers. As investment in acquisition, innovation, and marketing sustains, top-line growth will be robust.
It is important to note that recreational cannabis amounted to 85% of the total cannabis sold. I am therefore bullish on high margin recreational cannabis products that will be launched in 2020.
Concluding Words on CGC Stock
Canopy Growth has already established operations in 15 countries and stands as a diversified cannabis and hemp company.
Going forward, the main focus will be on value added medicinal and recreational cannabis products. That will drive margins and potential improvement in cash flows.
In the foreseeable future, cash burn will sustain, but I don’t see that as a concern for a high-growth stock with ample cash buffer.
After a sharp correction in the last few months, Canopy Growth stock is a strong buy.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
