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Canopy Growth Corp.: Are Investors Too Optimistic?

Canopy Growth Corp. (TSX:CGC) might be the most popular stock in Canada right now.

Let’s take a look at the cannabis producer to see if the company deserves its current valuation.

Market position

Canopy is the market leader in the Canadian medical marijuana space and continues to cement its dominant position.

The company has made several acquisitions in the past year in an effort to quickly consolidate the new market and add important production space and national brands. Canopy has also negotiated strategic partnerships and is expanding overseas.

The purchase of Mettrum Health Corp., once finalized, will give Canopy control of nearly half the current Canadian medical marijuana market. Aside from the large customer base, Mettrum also comes with additional production facilities and two national marijuana brands.

On the partnership front, Canopy has signed a deal with real estate developer the Goldman Group. Under the agreement, Goldman will secure or build new sites and outfit the facilities to Canopy’s production specifications. Canopy will then lease the facilities from Goldman.

The move is a smart one in that it enables Canopy to scale up its production footprint very quickly without tying up too much capital in the process.

Canopy has another partnership in Brazil and recently purchased a pharmaceutical distributor in Germany.

At the moment, all of the production is targeted at the medical marijuana market, but investors are hoping for much bigger things in the near future.

Recreational opportunities

Canada is exploring the possibility of setting up a legal market for the sale of recreational marijuana.

When asked about it at a recent town hall meeting in Sherbrooke, Prime Minister Trudeau said he wants to put a new law in place that makes it harder for youth to get access to marijuana.

The Federal Government received a task force report on the topic at the end of November, and the Liberals are expected to table legislation in the spring.

Investors are hoping the details will be ironed out over the second half of the year and the market will be open in 2018.

That’s the reason Canopy, a company with less than $10 million in quarterly sales and no profits, is currently valued at $1.25 billion.

Wishful thinking?

Things may roll out as investors hope, but there are big risks to Canopy’s stock price if the government decides to step back and take more time.

At the Sherbrook meeting, Trudeau said, “Be patient; changes are coming.”

The only country to use as an example at the moment is Uruguay, which has a population roughly equal to that of Toronto and its surrounding area.

Uruguay took five years to get all of the details in place before opening up its recreational market, so it would be reasonable to assume preparations for a Canada-wide roll-out might require a bit more than six to nine months.

Should you buy?

Canopy is doing all the right things at this point in the game, and the company is on track to be a major player in whatever market eventually becomes available.

For the moment, however, buying the stock at the current valuation looks at bit risky. I would search for other investment opportunities.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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