With recreational marijuana soon to be a reality across the country, Canada’s pack of pot companies are gearing up for the October start date, with Smiths Falls’ Canopy Growth Corp (TSX:WEED, NYSE:CGC) firmly in the pole position. And with the recent dip in share price, investors may be wondering if it’s time to buy Canopy. Don’t do it, says Don Lato of Padlock Investment Management, who argues that like many of the companies in the space, Canopy is overvalued.
Canopy announced its Q4 FY18 financials yesterday, posting revenue for the quarter of $22.8 million, which was an improvement over last year’s Q4 revenue of $14.6 million. Yet the company had a net loss attributable to shareholders of $61.5 million, far greater than the $12.8 million loss expected by analysts.
Canopy’s share price hit a new high of $48.72 last Friday but has since fallen back, opening trading today at $36.50.
Those gyrations in share price might be enough to scare away some investors. But if that won’t do it, Leto says that the sky-high valuations for Canopy and the rest of the pot stocks should make you wary.
“My view on the sector is that it is going to be an industry and there are going to be a number of significant players probably led by Canopy,” Leto told BNN Bloomberg recently. “They’re the biggest and have made the boldest moves so far. I just can’t get around the valuation.”
“You’ve got a company valued at $8 billion yesterday, now closer to $7 billion, that has $80 million in sales. Even if you look out to 2021, you’re only looking at potentially a billion dollars in sales, so it’s still trading at 8x three years out sales,” he said.
While the realized market for cannabis products in Canada is still a guessing game, estimates have been in the $6- to $10-billion range. With operations in every province across Canada, Canopy is expected to take a significant portion of those sales. But even so, projections for the company’s revenue go from about $300 million in FY19, close to $700 million in FY20 and around $1 billion in FY21.
“As great as the industry might be — and I think there are valid uses for medical marijuana and certainly recreational is going to have its participants, as well — this is like the Internet in 1999. The Internet is a wonderful thing but you wouldn’t want to buy a lot of those stocks at 1999 prices,” Leto said.
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