How Does Medical Cannabis Producer Canopy Growth Plan To Cater To The Newly Opened Recreational Marijuana Market

As Canada prepares to become one of the few developed nations to legalize adult-use of marijuana, prices of pot stocks in the country have been sky-rocketing over the past year. Given the vast opportunity that the passing of the Cannabis Act will bring starting in October of this year, there seems to be a strong upside potential for these Canadian cannabis stocks. Canopy Growth, which is the world’s largest publicly traded pot stock by market capitalization, is likely to witness a significant surge in its top-line from this move. Clearly, that is the reason why an affiliate of Constellation Brands (NYSE: STZ), which already had 9.9% stake in the company, acquired an additional CAD 200 million in the company’s recent sale of convertible debentures.

In our previous analysis – Medical Marijuana Producer Canopy Growth – Undervalued Or Overvalued? – we had talked about why we believe that the company has a huge upside potential despite some investors believing it to be overvalued. In this note, we discuss the company’s strategy to cater to the upcoming recreational marijuana market. You can view our valuation for Canopy Growth on our interactive dashboard and create scenarios to suit your assumptions.

Expansion of Production Capacity

As Canada becomes the first G7 nation to legalize adult-use of marijuana for recreational purposes, it is anticipated to witness a strong surge in the consumption of weed, which will open up a new and extremely lucrative market for cannabis companies in the country. According to market assessment, the sales of Canadian marijuana are expected to go up by more than $4 billion in the first year of its legalization ^[1].

With such a huge market potential, Canopy Growth is making all efforts to capitalize on this vast opportunity. Since the beginning of the year, the company’s licensed growing capacity has more than tripled to over 2.4 million square feet. It further plans to expand it to more than 5 million square feet of growing space by the end of next year, in order to cater to the anticipated rise in demand for its cannabis products. While the company does not provide any guidance for the production capacity, the market estimates it to produce in excess of 750,000 kilograms of cannabis each year at full capacity. This is significantly large compared to its Canadian competitors – Aurora Cannabis and Aphria.

Apart from the expansion, Canopy is also reorganizing its existing facilities in a manner that will enable it to optimize its output. For instance, the company is re-purposing the flower rooms at its facility in Smiths Falls, Ontario, to provide additional space for cultivation as well as for storing its final shipments. This will  enable the company to not only improve its output, but also improve speed of delivery of its shipments.

Inventories

Not only does Canopy have high production capabilities, it is also actively managing its inventories to meet the market demand once the adult-use of marijuana is legalized in October of this year. As of 31st March 2018, the company had 15,726 kilograms (kgs) of dried cannabis, 6,969 liters of cannabis oil, and 356 kgs of capsules worth $101.6 million. This is significantly higher compared to the company’s inventory in the prior year, implying that the management is proactively stocking up its products in anticipation of increased demand due to legalization of recreational cannabis. While this may not be sufficient to meet the sudden surge in demand post October, the company is in a reasonably good position compared to its peers in terms of inventories.

New Distribution Agreements

In addition to stocking up its inventories, Canopy has also secured multi-year supply agreements in 5 provinces and territories till date, representing a total commitment of over 25,000 kgs per year. In fact, it is the only company to be selected by all the provinces and territories that have announced their supply and retail partners. Also, the company has secured retail licenses in Manitoba, Newfoundland, Labrador, and Saskatchewan. This speaks of the company’s readiness to meet the anticipated demand and makes it the brand ambassador for the adult recreational cannabis market.

Investing In Marketing & Branding

In order to participate and lead the upcoming recreational marijuana market, Canopy has invested heavily in improving and expanding all aspects of its business operations. This involves investment in development of new and innovative products, and allocating a solid budget for the marketing and branding of its products. This budget will be utilized for the development of marketing and branding programs, recreational product packaging, cannabis retail and education programs, and business-to-business sales functions. These investments will enable the company to become an early leader in the upcoming recreational marijuana market.

In addition to this, Canopy recently announced the addition of well-respected cannabis industry veterans – Kirk Tousaw and Mat Beren – to its West Coast bench. The two will provide consulting services and collaborate with the company to enhance the quality of its products while supporting advocacy and community engagement. This will be an added advantage for Canopy, since advocacy and quality are crucial in the cannabis industry.

Do not agree with our forecast? Create your own price forecast for Canopy Growth by changing the base inputs (blue dots) on our interactive dashboard.

1. Legal marijuana could spark a $4 billion industry in Canada, CNN Money [↩]