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Canopy Growth Corp.: Is This WEED About to Bloom?

Canopy Growth Corp. (TSX:WEED) just reported strong quarterly results, and investors are wondering if the stellar growth can continue.

Let’s take a look at the cannabis producer to see if it should be in your portfolio.

The numbers

Canopy reported $9.75 million in revenue for the quarter ended December 31, 2016. That’s a 15% increase from the previous quarter, and 180% higher than the same period last year.

Operating expenses came in at $12.2 million, so the business is still losing money on an operational basis. Weighted average cost per gram was $2.47 compared to $2.77 in the prior quarter and $2.29 in the same quarter last year.

Canopy had more than 29,000 registered medical marijuana patients at the end of December — up from 8,000 at the end of 2015.

What does this mean?

Canopy is enjoying strong growth as the leader in the rapidly expanding Canadian medical marijuana market, and developments over the past few months should ensure the trend continues.

The company recently closed its acquisition of a major competitor, has partnered with a real estate developer to help ramp up production capacity, and purchased a pharmaceutical distribution business in Germany.

The successful purchase of Mettrum, which closed at the end of January, means Canopy now supplies about half of the registered medical marijuana patients in Canada. Mettrum also brings two national brands and additional production facilities.

Canopy knows it has to scale up quickly and has partnered with the Goldman Group to buy or build new production locations and outfit them to meet Canopy’s production requirements. Canopy will then lease the locations from Goldman.

The Canadian market is the prime focus for the moment, but Canopy is also setting up for sales to new regions. The purchase of a strategic pharmaceutical distributor in Germany will help the company expand its presence in the German market.

Should you buy?

Canopy is growing, but it still trades at a scary valuation. At the time of writing, Canopy has a market capitalization of $1.75 billion. That’s a lot for a company with quarterly revenue of less than $10 million.

Investors are hoping the Canadian government will make good on its plans to open the recreational market in 2018. If Ottawa meets that timeline and the estimated $5-billion-per-year market opens, Canopy will certainly benefit and sales could grow into the current valuation.

The risk for investors at this point lies in any delays coming out of Ottawa. If the government decides to slow down the process, or even worse, abandon it, the stock could take a serious hit.

Canopy is an attractive play on the expanding cannabis sector, and the business should continue to grow at a healthy clip, but I would avoid the stock at the current price.

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

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