Cannabis stocks have been on fire ever since Election Day 2020, with the ETFMG Alternative Harvest ETF (NASDAQ:MJ) rallying 45% since early November on the idea that a Joe Biden Presidency will pave the path for federal decriminalization and legalization of cannabis in the all important U.S. market. Leading this rally, of course, has been the cannabis industry’s biggest producer, Canopy Growth (NYSE:CGC). CGC stock has surged more than 50% since early November.
This optimism is not misplaced.
It increasingly appears that the federal legalization of cannabis in the U.S. is a matter of “when”, not “if”. It also increasingly appears that with the right laws in place, legal markets across the globe can and will eventually attract demand away from the black market — and that this legal channel demand will inevitably be rather larger.
Connecting those dots, the global stage is set for the long overdue pot stock boom to finally come to life over the next few years.
As it does, CGC stock will stay in rally mode.
Here’s a deeper look.
Canada Turning a Corner
For the last several years, cannabis stocks (right on down to Canopy Growth) have been crushed under the weight of lofty expectations. But now? The tide is turning, and cannabis is about to break through in a big way.
Just look to Canada, a country where cannabis market restrictions were eased to form an improved legal framework. That framework is finally pulling demand away from the black market and into the legal market.
So what is Canada implementing differently? For starters, they’ve moved retail store openings from a “lottery system” to an “open licensing” model; brought cannabis derivatives, such as edibles and beverages, into the market to meet consumer demand; and slashed the price of legal pot beneath black market street prices.
As a result, in the second quarter of 2020, Canada’s legal pot market has now bested its spending in the black market.
U.S. Legalization on the Horizon
At the same time, U.S. legalization efforts are starting to gain serious momentum.
Of the five states with cannabis legalization on the ballot, all five passed it. Even conservative states such as Montana and Arizona have gotten in on the cannabis craze.
What’s more, President-elect Joe Biden has signaled that his administration would federally decriminalize cannabis. That’s a significant step towards eventual nationwide legalization.
If you’re keeping score, that means Canada’s legal cannabis market is on the cusp of finally coming into its own and the U.S. legal cannabis market is ready to come to life. The stage is set for this struggling industry to shift into hypergrowth, which bodes very well for Canopy Growth stock.
Canopy Growth Is an Attractively Positioned Leader
Canopy Growth is already the unrivaled leader in the global cannabis market, in terms of market value, sales, product distribution, and production volume.
By itself, this early leadership position puts Canopy Growth is a great place to benefit from the rising cannabis tide over the next few years. But Canopy Growth is more than just big. The company also more resources than any other cannabis producer in the world to further extend its dominance.
Early on, Canopy Growth leveraged its leadership position to score a huge investment from global alcoholic beverage giant Constellation Brands (NYSE:STZ). Thanks to that big investment, Canopy Growth has more than $1.3 billion in cash and short-term investments on its balance sheet. By comparison, most of Canopy’s peers as so cash strapped that they have major liquidity risks.
Thus, Canopy’s big resource advantage means that as the global cannabis market booms over the next few years, Canopy will be able to invest in various emerging growth opportunities while its peers simply try to stay afloat.
The result, of course, is that Canopy will be even more dominant player in the cannabis market in five years than the company is today.
At the same time, Canopy Growth has taken big steps over the past few years in order to streamline operations, reduce its cost basis, and improve cash flows. This sets the stage for Canopy to be a more profitable producer going forward, meaning that big revenue growth in coming years will flow into big profits, too.
Net net, Canopy Growth — and by extension, CGC stock — is attractively positioned to benefit from the coming pot stock boom.
Canopy Growth Stock Has Upside Potential
The last thing to address here is valuation.
My numbers imply that CGC stock is fairly valued around $30 per today. Those numbers assume that the global cannabis market surges to be worth more than $50 billion by the end of the decade, Canopy Growth controls about 10% of that market, and operating margins rise to around 20% (which is roughly where they hover in the alcoholic beverage industry).
Those are reasonable assumptions. Indeed, I’d say they are fairly conservative. The global cannabis market could march to $100+ billion in size by 2030. Canopy could control closer to 20% share. Operating margins could pan out around 30%.
In other words, my $30 price target on CGC stock should be seen as a conservative price target. If a few things go right for this company, the stock is worth much more than $30.
Bottom Line on CGC Stock
For years, CGC stock has been a disappointment. That disappointment phase is now coming to a close. What comes next is the hypergrowth phase. During that phase, CGC stock will be a big winner.
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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