Tuesday was a blockbuster day for marijuana stocks. Leading cannabis grower Canopy Growth (NYSE:CGC) reported strong third-quarter numbers while guiding for ~45% revenue growth over the next few years. On the same day, peer grower Tilray (NASDAQ:TLRY) inked a deal with Grow Pharma to distribute medical cannabis products throughout the U.K. The whole sector shot higher on the good news, with CGC stock (+11%) and TLRY stock (+37%) leading the way.
This is the beginning of a big breakout for CGC stock and all marijuana stocks.
The cannabis industry has been riddled with legal and supply problems for several years now. But those problems are now fixing themselves, as governments across the globe are more broadly giving the green light to marijuana legalization and growers are figuring out how to get the right products to the right consumers at the right times.
The result? The cannabis industry is making a huge comeback. Over the next few years, this sleepy and disappointing industry will wake up and sprint into hypergrowth mode.
The best way to play this cannabis comeback? By buying CGC stock.
Here’s why.
Canopy’s Blowout Numbers
Canopy Growth’s third-quarter numbers were exceedingly good.
Revenues rose 23% year-over-year and 13% quarter-over-quarter. This continues what has been an impressive ramp in revenues all year long. The company has now reported three straight quarters of positive sequential revenue growth, with growth being driven by market share gains in Canada, new beverage products and expansion into the U.S. market where its Martha Stewart line of products is selling very well.
Gross margins clocked in at 26%. That’s up seven points quarter-over-quarter. Again, this continues a multi-quarter ramp-up in margins. The company has now reported three straight quarters of positive sequential gross margin expansion, too. This expansion is being driven by better demand, tighter supply, and more favorable unit economics.
Adjusted EBITDA loss was -C$68.4 million in the quarter. This also continues the favorable trend of shrinking EBITDA losses at the company. Canopy’s EBITDA loss has shrunk in each of the past four quarters, thanks to this new management team being hyperfocused on cost-cutting and rationalizing and streamlining business operations.
All in all, everything is trending in the right direction for Canopy Growth today. Revenues are ramping. Gross margins are expanding. Losses are shrinking. If all these trends persist, then Canopy will one day be a very big, very profitable cannabis grower.
Fortunately for CGC stock bulls, management said in the Q3 press release that all these trends will persist.
Sprinting in Hypergrowth Mode
Better than Canopy’s blowout third quarters, were management’s comments about where the company is going over the next few years.
In short, they basically said that Canopy Growth will, indeed, sprint into hypergrowth mode over the next few years, which — when coupled with cost rationalization — will lead to enormous profit margin expansion.
Management said that they expect revenues to rise at ~45% compounded annual growth rate between fiscal 2022 and fiscal 2024. This compares to ~23% revenue growth in Q3, implying meaningful growth acceleration in the coming years. This acceleration is expected to be driven by continued easing of Canadian legal market restrictions pulling demand into the legal channel, and favorable developments in the U.S., Europe, and Mexico creating new opportunities for Canopy to expand its business.
At the same time, management said that they expected adjusted EBITDA to pop into positive territory in the second half of fiscal 2022, and for EBITDA margins to clock in around 20% in fiscal 2024. That’s up from negative margins today. So, in essence, management is saying that big revenue growth plus their cost rationalization plans will drive huge profit margin expansion over the next several years.
This bullish medium-term broadly underscores two things.
One, the global cannabis market is finally coming into its own, thanks to favorable legal developments.
Two, Canopy has finally figured out how to capitalize on demand without spending an arm and leg to acquire customers.
Those two big picture takeaways are exceptionally bullish for CGC stock.
Valuation Upside for Canopy Growth Stock
It increasingly appears that, indeed, Canopy will one day turn into a very big and very profitable consumer brand in the very big global cannabis market — something like the Altria (NYSE:MO) of marijuana.
Assuming so, I see this as a $10-plus billion revenue company one day, with 30%-plus EBITDA margins. Under those assumptions, my modeling says that Canopy Growth could do about $5 in earnings per share by calendar 2030.
Based on a 23X forward earnings multiple and an 8% annual discount rate, that implies a calendar 2021 price target for CGC stock of over $60.
I think that’s where the CGC stock price will trend over the next 12 months.
Bottom Line on CGC Stock
The cannabis comeback is on, at the same time that Canopy Growth is figuring out how to capitalizing on surging demand without spending an arm and a leg.
That’s a powerful combination which should keep Canopy Growth’s revenues, profits and stock price on an uptrend for the foreseeable future.
The investment implication? Buy (and hold) CGC stock.
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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