The Motley Fool

Will the Party Continue for Canopy Growth Corp.?

On Monday this week, Canopy Growth Corp. (TSX:CGC) reported earnings, exceeding estimates and reporting a profit of $5.4 million on revenues of $8.5 million. In response to the news, shares rose by 19.5% to $11.16 per share. Clearly, it was a good day for investors.

Looking at the past few months for the company, investors have had a great time holding the stock. Since September, the stock is up almost 250%. What a party!

But there’s a lot more to it than just the earnings and revenues. In the past five quarters, revenues have increased from $2.466 million to $8.498 million–an increase of 245% in only five quarters. What makes this story even more scintillating is the increase in clients, or patients, as the company refers to them. The total number of clients increased from 6,272 to 24,477 in the same period–an increase of 290%.

What we learn from the increase in total clients vs. the increase in revenue is that new clients are buying just a little less product than the older clients. Although the increase in clientele is a good thing, it is not what blew the results out of the water.

In the past quarter it was announced the company had a gain in their assets of $16.1 million, reflecting the strong expectation of continued demand for the product offered by the company. Basically, the outlook is fantastic going into the future. Offering medical marijuana, the company is currently the biggest player in a high-growth market.

As of right now, marijuana in Canada is only available for those needing it for medical purposes, but with a return of almost 250% in only a few months, investors may be pricing in greater sales or clientele than is realistic. At the current price of $11.16, the legalization of marijuana may be priced into the security.

Uniquely positioned as Canada’s dominant competitor, the company could reap huge benefits from sale of marijuana to anyone wanting to buy it. The risk in this case, however, is the chance the government doesn’t legalize the product and the market remains the medical-treatment field only.

Canopy doesn’t currently pay a dividend, so the return for investors will come in the form of capital gains only. At this time, although a net profit has been recorded, it is not because of an inflow of cash. The net profit recorded was due to an increase in the value of the company’s assets.

For existing investors, the party has been a really good time, leading them to play with house money. For anyone looking at a new point of entry into the stock, it may be best to be cautious.

Because we aren’t sure if the fun times are behind us or still ahead, this stock will be one to watch for a long time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman has no position in any stocks mentioned.

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