When it comes to Canada’s sizzling medical marijuana sector, a million dollars just isn’t cool anymore. Well, at least not for Canopy Growth Corp (TSX:CGC).
Spurred, as many medical cannabis stocks were, by a vote to legalize marijuana in the state of California, Canopy this week soared past the billion dollar market capitalization mark. With a couple hours left until the markets closed on Friday, the stock was trading at $9.36, giving it a market cap of $1.2-billion.
The milestone for Canopy comes just two-and-a-half years after it began to trade publicly as Tweed Marijuana. The company went public through a comparatively humble reverse merger than netted it $30-million and management set about turning a former Hershey’s chocolate plant in Smiths Falls, Ontario into a marijuana empire.
It wasn’t long before Tweed was making moves that surprised the market. A few months after its public listing the company announced it would acquire Bedrocan Cannabis, a Canadian licensee of Dutch government-contracted licensed producer Bedrocan BV, in a deal valued at approximately $61.0-million.
By September of 2015, the company had renamed itself Canopy Growth Corp., with the Tweed and Bedrocan brands continuing to operate as distinct entities, an arrangement that was cemented when Tweed struck a three year branding deal with Snoop Dogg a few months later.
Medical marijuana stock began to gain serious attention from market watchers a few months into this year, when comments from Canada’s Minister of Public Safety Ralph Goodale were interpreted as a sign that marijuana legalization was closer to becoming a reality than previously thought, a development that is generally regarded as good news for Licensed Producers.
“The preset regime with respect to marijuana has obviously failed and failed miserably because Canadian teenagers are among the heaviest users of marijuana in the Western Word, yet there has been no timeline set by the federal government,” Goodale told CBC’s “On The Coast” host Stephen Quinn.
By this past summer, a group of medical marijuana stocks had identified themselves as nascent leaders in the space. In a report to clients in July, PI Securities analyst Jason Zanberg identified four, Aphria (TSXV:APH), Canopy Growth Corp. (TSXV:CGC), Mettrum Health (TSXV:MT) and OrganiGram Holdings (TSXV:OGI), as head an shoulders above the rest.
Zandberg, who initiated coverage of the aforementioned stocks with “Buy” ratings, said he thought the coming years will be ones of strong growth for the Canadian marijuana market, with demand from both recreational and medicinal users. The analyst said that by 2019, which he estimated to be the first year after recreational use will be permitted, the market will be worth $4.6-billion. He said he expected this will grow 10 per cent annually, reaching $7.4-billion within the first five years, evenly split between medicinal and recreational users.
Zandberg said Canopy’s 350,000 square-foot greenhouse facility has the potential for low-cost production, and that early investments into its processes and practices wold pay dividends in the long run.
The run in Canadian marijuana stocks, of course, is fueled not just by their potential in the domestic market, but by the idea that one or more LPs could become international brands. It’s something Canopy founder Bruce Linton thinks is grounded in reality.
“Canadian LPs will have a big advantage when it comes to our SOPs (Standard Operating Procedures) and how to grow high quality product that stands up to third party testing and an increasingly discerning consumer base,” said Linton last year. “Two documentary film makers were recently visiting Tweed to do a cross-border comparison and they couldn’t believe the processes and procedures required to run a medical marijuana facility in Canada vs. the Wild West scenario they witnessed in Denver.”
While the potential for Canopy and other leaders in the medical marijuana space seems boundless, others are suggesting a pause may be in order. In late October, M Partners analyst Mason Brown said that while he likes the company a lot, its stock may have gotten ahead of itself.
“We believe investors should continue to hold CGC given our long-term outlook of the company being a dominant player in the dual medical + recreational cannabis market, opportunities for strategic international transactions (export agreements, equity ownerships, JVs), and significant expansion capacity at its multiple facilities,” said the analyst. “Nothing has changed fundamentally over the past 1.5 months that would have us revise our estimates; however, we believe CGC’s valuation looks frothy when taking into account a reasonable investment horizon.”
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