Canopy Growth Corp. (TSX:WEED) pulled back below the $10 mark after Ottawa revealed the details of its long-awaited plan to legalized recreational marijuana sales.
Let’s take a look at the current situation to see if this is an opportunity to buy the stock.
Market leader
Canopy is the market leader in the medical marijuana space and is widely viewed as the front runner to capture a significant part of the recreational market.
The opportunity is certainly attractive with some pundits estimating the recreational market could be worth at least $5 billion per year.
This has fueled strong speculative buying in the budding marijuana sector with Canopy currently sporting a market capitalization of $1.55 billion.
That’s a hefty valuation for a company with about $10 million in quarterly revenue.
Is Canopy worth it?
Management is doing all the right things at this point in the game. The company is expanding its production footprint through strategic partnerships and acquisitions and setting up for both domestic and global growth.
Last fall Canopy entered a real estate arrangement with the Goldman Group which will see Goldman acquire or construct sites and outfit them to meet Canopy’s production requirements. Canopy will then lease the locations from Goldman.
Canopy has also added important production capacity and new brands through the purchase of competitors. The most important deal is arguably the takeover of Mettrum Health.
In addition, Canopy owns a pharmaceutical distributor in Germany and has a partnership in Brazil.
So, the business is positioning itself to capitalize on the growth of medical marijuana demand in Canada and abroad, while preparing for the potential opportunities in the recreational space.
Risks
Investors are betting the legal recreational market will be open in July 2018. That might turn out to be the case, but there are reasons to be cautious, as Ottawa has decided to make the provinces and territories responsible for sorting out the details on pricing, sales, and distribution.
This is no easy task, given the potential size of the market and the risks politicians might face if the roll-out doesn’t go well.
The biggest issue might be pricing.
Too much tax could send buyers to the black market, while not enough tax could see the project become a cash drain on taxpayers.
Politicians will want to have strong documentation to support their decisions, so it’s likely that committees will have to be set up, studies commissioned, and public forums held before anyone commits to a time frame. Until the potential costs of implementation of the market and enforcing the regulations are known, investors aren’t likely to get much of an indication as to when the market will open.
If politicians start to get nervous, the whole process could get kicked down the road.
Should you buy Canopy today?
Canopy is the market leader with a strong management team and solid momentum.
However, at the current valuation, the stock appears priced for perfection, so further downside is a risk if the market starts to think the roll-out might be delayed.
As a result, I would wait for the provinces to start laying out their plans before buying the stock.
