In just the past month, we have seen Canopy Growth Corp.’s (TSX:WEED) stock price rise over 40%, and in three months it has doubled. However, there’s reason to think this might just be the tip of the iceberg. As the marijuana industry continues to take off, Canopy’s stock will be front and centre.
Below are three reasons why Canopy could see its share price triple.
High price-to-sales ratio shows investors are paying a big premium for Canopy’s stock
The company is not posting profits, so we can’t use a conventional price-to-earnings ratio to assess its value, but we can use price to sales instead. With a market cap of ~$3.1 billion and earnings in the last four quarters totaling just under $50 million, investors are currently paying ~62 times the company’s sales.
In the company’s last quarter, its revenue more than doubled year over year, and in its last fiscal year, sales were more than triple the prior year’s tally. There’s no reason to think that Canopy won’t double or triple its annual sales for its current fiscal year again, and that alone would likely propel the stock to two or three times its current value.
However, given the current trajectory, the price-to-sales ratio could continue to rise and would accelerate the share price’s growth even further.
The company has already established itself as a market leader
Provinces are expected to put in heavy restrictions on how a marijuana grower will be able to advertise, similar to what we see in effect today for tobacco companies, which is next to nothing. Any way that a company can differentiate itself will be of paramount importance, especially as new cannabis companies continue to pop up.
In just the past six months, we have seen MedReleaf Corp. (TSX:LEAF) and Aurora Cannabis Inc. (TSX:ACB) list on the TSX, and before legalization day comes. we could see many more new entrants on the TSX looking for a piece of the market.
However, Canopy has already made a name for itself and already secured a big supply deal with one province. Companies that are leaders in their industries will garner more of a premium, so Canopy’s already hefty premium that investors are paying on sales could be even higher.
Strategic partnerships could accelerate growth
Canopy recently reached an agreement with Constellation Brands, Inc. (NYSE:STZ) in which the two companies would collaborate on cannabis-infused drinks, and Constellation would help Canopy with branding and marketing.
Last month, Canopy also entered an agreement with a producer in Jamaica, which would give the company an entry into the Jamaican medical marijuana market.
These are just two examples of how Canopy has been working on extending its reach not just geographically, but also into new products and markets. These types of agreements will help accelerate the company’s sales growth and ultimately its share price as well.
As Canopy continues to grow its sales at an incredible pace and investors pay a significant premium on sales, it seems sooner rather than later that the share price will triple.
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Fool contributor David Jagielski has no position in any stocks mentioned.