Canopy Growth Corp.: The Pros and Cons of Owning This Stock

Canopy Growth Corp. (TSX:WEED) is solidifying its position as a market leader. Is this the right time to own the stock?

| More on:

Canopy Growth Corp. (TSX:WEED) has captured the imagination of Canadian investors across the country.

Let’s take a look at the reasons to own the cannabis producer as well as some of the risks.

Pros

Canopy is firing on all cylinders, and it appears the company is making all the right moves in a rapidly expanding industry.

What going on?

In recent months, Canopy has secured its position as the dominant force in the Canadian medical marijuana market through a series of takeovers.

The largest and most significant is the acquisition of Mettrum Health Corp., which added two national brands and significant production capacity. The deal, which closed at the end of January, also brought Canopy to the point where it now supplies nearly half of the registered medical marijuana patients in Canada.

In addition to acquisitions, Canopy has entered an agreement with a real estate company, the Goldman Group. The arrangement will see Goldman buy or build facilities and outfit the sites to meet Canopy’s production requirements. Canopy will then lease the locations from Goldman.

The move is key to ramping up production capacity as fast as possible and doesn’t require as much upfront capital as would be required if Canopy acquired the properties itself.

In January, Canopy also acquired the property that houses its head office location. The deal gives Canopy 472,000 square feet of space that could be used to triple current production and processing capacity.

Canada is the core focus for the moment, but Canopy sees international opportunities emerging. The company purchased a German pharmaceutical distributor in November and has a joint venture based in Brazil.

To top things off, a memorandum of understanding was signed recently with Namaste Technologies, which is a business that provides cannabis accessories through its e-commerce retail operations in more than 20 countries.

Canopy reported impressive numbers for the quarter ended December 31, 2016. Revenue was $9.75 million — up 180% year over year and 15% higher than the previous quarter.

So, the company is on track to be a dominant player in a rapidly growing segment.

Cons

The big knock on the stock is the company’s valuation.

At the time of writing, Canopy has a market capitalization of $2 billion. That’s pretty steep for a business with quarterly revenue of less than $10 million.

What’s the reason?

Investors are hoping Ottawa will make good on its plans to open the recreational marijuana market in 2018.

The government received its task force report at the end of November and is expected to table legislation in the coming months.

If all goes as investors hope, Canadians could have the opportunity to buy recreational marijuana sometime next year, and Canopy would be positioned well to get a large piece of the pie.

Estimates vary, but some analysts believe the market is worth at least $5 billion per year.

The risk for investors lies with any delays coming out of Ottawa. The government has to get the roll-out right, and some of the details might start to hold up the process.

One issue is taxes. Ottawa and the provinces are probably looking at the industry as a revenue gold mine, but taxes that are too high could drive consumers to the black market.

At the same time, not enough tax could result in companies reeling in all the profits and taxpayers left holding the bag for all the costs related to policing the market.

To put things into perspective, tiny Uruguay took about five years to sort out its legalization structure, so it seems a bit ambitious to think Canada can wrap it up in a year.

Should you buy?

Canopy is doing all the right things at this point in the game and is positioned well to dominate the industry.

That said, the stock appears priced for perfection, and relying on Ottawa to deliver the goods next year might be a bit optimistic. If the legalization of the recreational market hits a speed bump, or gets halted altogether, Canopy and its peers would likely take a big hit.

As such, I would avoid the stock at the current price.

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 Andrew Walker has no position in any stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »