Canopy Growth Corp. (TSX:WEED) had an incredible year in 2017 that saw its share price rise by more than 225% — and the stock is not showing any signs of slowing down in the new year. We are not even 10 trading days into 2018 and the cannabis stock has already produced returns of over 40% year-to-date.
Currently, Canopy Growth has a market cap of just over $8 billion, and at this point, it looks like it might hit $10 billion before the month is over. To achieve that feat, the cannabis stock would have to trade at nearly $53. At that valuation, Canopy Growth would rival Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX), a company that had more than $10 billion in sales in 2016.
A valuation that high would also make Canopy Growth’s market cap higher than BlackBerry Ltd. and Inter Pipeline Ltd.
Even at its current $8 billion valuation, Canopy Growth already has a higher market cap than Air Canada (TSX:AC)(TSX:AC.B) and Cameco Corp. (TSX:CCO)(NYSE:CCJ). While Cameco Corp. has been struggling amid a low price of uranium, Air Canada had a tremendous 2017 and has great prospects for growth in 2018.
One of these isn’t like the others
While the companies listed above have all recorded over $1 billion in revenue in their most recent fiscal years, Canopy hasn’t even reached $100 million. In its trailing 12 months, the cannabis company’s sales have totaled just $58 million and it has struggled to stay out of the red.
Future expectations are driving the price of cannabis stocks up, but it is hard to see where this incredible growth is going to come from. Even if the industry in Canada is worth more than what was estimated by Statistics Canada, Canopy Growth is still going to have to compete with many other companies like Aurora Cannabis Inc. and Aphria Inc. for market share.
While Canopy Growth has made strides to grow its sales outside of Canada, that’s not going to be enough for the company to justify its valuation. The U.S. market could have significant opportunities for growth, but until we see pot legalized federally, Canadian cannabis companies will not be able to expand south of the border without facing the risk of being delisted from the TSX.
With a republican government in place, investors shouldn’t expect favourable pot policies in the U.S. anytime soon. Government policies will have a big impact on how much the cannabis industry will be allowed to grow, both in the U.S. and Canada.
Have pot stocks run out of room to grow?
Cannabis stocks are definitely overvalued, and it’s difficult to find a rationale for the sky-high valuations we’re seeing in the industry today. There’s a growing danger that cannabis stocks are going to hit a ceiling very soon, because the rate at which pot stocks are rising is simply unsustainable.
These investments are becoming very speculative, and while investors may be enjoying the ride today, it’s going to run out of steam sooner or later. The danger is that when a correction does happen, it will be a big one.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of BlackBerry and Valeant Pharmaceuticals.