How High Can Pot Stock Canopy Growth Corp. Go?

On July 1, 2018, Canada will become only the second nation in the world where recreational cannabis is legalized for the entire country. While the medical marijuana market was estimated to be roughly $250 million in 2017, the addition of recreational cannabis use, is expected to increase the potential market size manifold. As per an estimate by CIBC World Markets, the recreational cannabis market in Canada could be valued at anywhere between $5 billion and $10 billion per year. One such company that can take advantage of the enormous potential of this market is Canopy Growth Corporation (TSX: WEED), which has also applied for its shares to be listed on the New York Stock Exchange (NYSE). Alcoholic beverage giant Constellation Brands is one of the investors in this company, having a 9.9% stake.

We have created an interactive dashboard analysis to estimate Canopy Growth Corporation’s valuation based on its expected revenues for FY 2018 (year ended March 31, 2018). You can make changes to these variables to arrive at your own price estimate for the stock.

We have arrived at a $38 price estimate for Canopy Growth Corporation based on revenue projections of CAD 79 million for 2018, a P/S multiple of 85, and a share count of 178.5 million. The market price stood at CAD 32.38 as of May 14, 2018, implying our price estimate is higher by 16%.

The P/S Multiple in this industry has been considerably high, given the enormous potential expected in the coming years. Investors have been willing to buy the shares of pot stocks at significant premiums, with other companies in the space garnering P/S multiples touching 200. Moreover, with the addition of recreational marijuana use, the revenues for companies like WEED should grow immensely from FY 2019 onward.

Besides growth in the overall medical cannabis market, there are a number of other factors that should result in a rise in both the revenue drivers – grams sold and average price per gram.

1. Launch of CraftGrow Line: The launch of this line, on April 17, 2017, on the company’s online platform – Tweed Main Street – gives customers access to “high quality cannabis grown by a diverse set of producers.”  While the website was started as a platform where the company could sell the products of all its subsidiaries in one place, it has now grown beyond its own brands to include 8 to 10 sub-brands offering 50 SKUs of products. Currently, the platform has a majority of the company’s own brands, but many should flock to it, given the fact that it is a singular platform where customers can get access to different types of products.

2. Acquisition of rTrees Producers Limited: The acquisition of rTrees, which will operate under the name Tweed Grasslands, was completed in April 2017. In June of last year, Tweed Grasslands received its cultivation license, and became Canopy Growth’s sixth licensed production site. Production at this facility was commenced in July to support increased demand from cannabis for medical purposes.

3. Introduction in International Markets: In January 2017, Germany legalized medical cannabis. Governments in other countries such as Australia, Brazil, Chile, Jamaica, Israel, Mexico, and South Africa are also encouraging research into medical treatments with the use of cannabis. Consequently, Canopy Growth announced its entry into Germany, Brazil, and Australia, and is evaluating other international opportunities, ensuring volume growth for the company. In the second half of 2017, the company also entered into supply license agreements to supply cannabis in Spain and Australia, a joint venture in Denmark, and a strategic partnership in Jamaica.

4. Agreement with the Province of Prince Edward Island (PEI): The company entered into a two-year agreement, extendable to three years, in January 2018 which will guarantee the supply of high-quality cannabis into PEI’s retail and online stores. The company has stated the volume for the first year would be a minimum of 1,000 kg.

As a result of the above factors, and consequently a growth in both the metrics, we expect the revenues to increase to roughly CAD 79 million in FY 2018.

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