Canopy Growth Corp.: Is This the Best Marijuana Play?

Canopy Growth Corp. (TSX:WEED) is definitely expensive, but all signs point to continued growth, so I would buy it.

| More on:

There are three companies that are worth investing in for exposure to marijuana, but I believe that there is one that has the ability to create a strong, revenue-generating operation: Canopy Growth Corp. (TSX:WEED). With that said, investors have to ask whether this is the right time to buy shares or if exuberance has taken hold.

Let’s dive in and take a look.

In the past month, the stock has catapulted by nearly 50%. And if we consider the past quarter, investors have been rewarded with a 126% boost in share price. Whenever a stock doubles in such a short period of time, investors get happy. But what happened to create such excitement?

The big news over the past few months is the announcement that Constellation Brands, Inc. (NYSE:STZ) had purchased a 10% stake in the company with the goal of producing cannabis-infused drinks. Constellation owns brands like Corona, Modelo, Svedka, and a variety of other beer, wine, and spirits.

This is a big step for Canopy, because it adds considerable resources with Constellation’s backing. And with a steady move toward recreational legalization in Canada — and expected in the United States at some point — this is a move that could have a significant impact on revenue over the coming years.

But it’s still going to take time for this deal to really generate revenue, because legalization is still being worked through, despite the Federal government regulating it. New Brunswick will be acquiring four million grams of marijuana from Canopy, and the province will allow pot stores, which is a big win. In Ontario, specialty stores will be allowed to sell marijuana, but not dedicated stores. And Alberta is echoing alcohol-distribution laws, requiring a government-regulated distributor to be the wholesaler.

All this means that although Canada is well on its way to being legalized, it’s still going to take some time before we see beverages infused with cannabis.

With that said, can we project what revenue is going to be going forward? Fellow Fool writer Ryan Goldsman has a theory. He determined that revenue over the past two fiscal years was 144% of each of those year’s capex. Therefore, he’s projecting that revenue will come in at $82.25 million, which is obviously a massive boost from the previous couple of years.

But he theorizes, and I agree, that as Canopy continues to perfect its business, it’ll be able to generate even more revenue from the same capex. Essentially, early years were spent understanding how to generate revenue, and as it reaches scale, more revenue will come from the same investment.

Even at $82.25 million in revenue, Canopy is incredibly expensive with a market cap of $3.8 billion. Unfortunately, we have a problem: investors are not valuing Canopy like they would any other stock, so if revenue continues growing, we might very well see the multiples and exuberance remain. Frankly, Canopy is the best weed stock in Canada right now, so if you’re looking for exposure to what will definitely be an explosive market, I would buy at these prices.

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 writer Jacob Donnelly does not own shares of any company mentioned in this article.   

More on Investing