The once red-hot cannabis market has gone ice-cold in recent weeks, as optimism regarding favorable legal developments and strong sales in Canada has waned. This has led to a pretty steep sell-off in the industry’s leader, Canopy Growth (NASDAQ:CGC). Not too long ago — in early February — Canopy Growth stock was on its way to $60. The CGC stock price today sits below $30.
This 50% haircut in a fundamentally strong company that is the market’s best play on the burgeoning global cannabis megatrend is a golden buying opportunity.
Setting near-term trading dynamics aside, this is a company that — thanks to favorable legal developments, shifting consumer demand, and its robust growing capacity and product portfolio — will sustain 40%-plus revenue growth over the next few years. Margins will improve, too, and today’s wide losses, will soon turn into sizable profits.
As all that happens over the next few years, CGC stock will roar higher. Not by a little. By a lot. This stock is worth $50 today, meaning that a run back to all time highs is in the cards once investor sentiment turns a corner.
Here’s a deeper look.
CGC Stock: Strong Macro Trends
The bull thesis on CGC stock breaks into three parts.
One, the fundamentals underlying the cannabis megatrend are rapidly improving. Two, Canopy Growth has put itself in a position of strength to emerge as the biggest player in this megatrend. Three, the valuation on CGC stock today does not price in this company’s enormous earnings growth potential over the next few years.
Let’s break apart that first claim: The fundamentals underlying the cannabis megatrend are rapidly improving.
Canada has figured out how to sell weed legally. For several months, Canada’s legal pot policies were too restrictive and resulted in exorbitantly high prices, so consumers stuck to the black market to buy weed. But, Canada has eased those policies dramatically in recent quarters, and as they have, the legal pot channel has taken off like a rocket-ship.
In 2020, Canada’s legal pot sales rose 120% year-over-year. That’s a big number. More importantly, in the third quarter of 2020, legal pot sales in Canada overtook illegal pot sales for the first time ever. That marks a critical inflection point wherein Canada’s legal channel will start to be the go-to cannabis purchasing channel.
Meanwhile, multiple U.S. states have legalized cannabis over the past few months, with many more expected to do so this year. The Democratic-controlled Senate is also expected to push aggressively on federal cannabis decriminalization and potential legalization.
Down in Mexico, they’ve legalized weed, too. Over in Europe, Poland and Ukraine are inching closer towards legalization. In Africa, South Africa and Egypt are making potential legalization moves, too.
The long overdue “Cannabis Boom” has arrived. Over the next decade, pot will become globally legal, and those hundreds of billions of dollars that are spent on cannabis illegally today, will shift towards legal channels, creating new global titans of cannabis that will command enormous valuations like the titans of the alcoholic beverage industry.
Canopy Growth will be one of those titans.
Strong Company Fundamentals, Too
Canopy Growth has positioned itself to be one of the most important companies — if not, the single most important company — in the global cannabis market by 2030.
Canopy Growth is the industry’s first-mover. As the first-mover, Canopy is growing and selling more weed than anyone else. The company’s projected $450 million in fiscal 2021 revenues dwarfs every other company’s revenue base in this space. Overall market share in Canada clocked in at 15.7% in the third quarter of fiscal 2021, including 34% market share in beverages.
This early lead looks defensible. Canopy Growth has established multiple ultra-popular brands — including the Martha Stewart brand, the SurityPro brand, the Tweed brand, and the Biosteel brand — that are developing strong brand equity and customer loyalty.
Plus, the company has distribution agreements all across Canada, the U.S., and Europe, giving these ultra-popular brands an unrivaled distribution network. And, perhaps most importantly, Canopy Growth has $1.6 billion in cash and short term investments on its balance sheet — a number unmatched in the cannabis industry — and is backed by Constellation Brands (NYSE:STZ), who will likely be more than willing to inject more cash into Canopy if the company needs it.
These unrivaled resources give Canopy Growth the firepower it needs to capitalize on growth opportunities via acquisitions and partnerships. So long as management executes strongly on those expansions, it will be tough for anyone to catch Canopy Growth in this space.
Also of note, Canopy’s management team is being smart about this growth. That is, the company isn’t “growing at all costs”, like it used to. Now, Canopy is taking a measured and strategic approach to growth, balancing its spending with its organic growth rates. That’s why gross margins are rapidly rising, and adjusted EBITDA losses are rapidly narrowing.
Net net, Canopy Growth is the strongest company in a megatrend with improving underlying growth trends. That’s a winning recipe for CGC stock.
Big Upside Potential
Look at the market cap for Canopy Growth. It stands at $10 billion.
Now, go look at the market caps for Anheuser-Busch, or Heineken, or Diageo, or Constellation Brands. Those are $50 billion to $150 billion companies.
There’s no reason Constellation Brands won’t be that big one day. Demand for cannabis is nearly as large as demand for alcoholic beverages, and demand for cannabis has been rising more rapidly than demand for alcoholic beverages. Cannabis is inching its way towards being globally legally one day. Cannabis companies like Constellation are already establishing brands that will be the equivalent of Corona, or Budweiser, or Heineken. Profit margins at scale should look identical.
In other words, over the next decade, you will see the Anheuser-Busch and Diageo of cannabis emerge — and those companies will command valuations similar to their alcoholic beverage counterparts.
Canopy Growth will be one of those companies. To that end, this is a $50-plus billion company in the making. The long-term upside potential in CGC stock from today’s $10 billion market, then, is enormous.
Bottom Line on CGC Stock
Canopy Growth stock is one of my favorite plays on the burgeoning cannabis megatrend, which will be one of the most defining investment megatrends of the Roaring 2020s.
But it’s not my favorite cannabis stock to buy today.
Instead, my favorite cannabis stock to buy today is a smaller, less-well-know cannabis retailer with huge upside potential over the next decade.
This tiny stock could be your next 10X winner. You can learn all about it — and more — by subscribing to Innovation Investor here.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.