It would appear as though Canopy Growth Corp. (TSX: WEED) stock has begun to take off again, which should have Foolish investors asking themselves, “Exactly how high can it go this time?”
Following a “cooling off” period that extended through the first four months of 2018, Canopy Growth stock has once again continued its ascent, up at one point just shy of 44% over the first three weeks or so of May, giving back some those gains since then, but it’s still up a very respectable 32% since April 30.
Despite what have, undeniably, been some pretty aggressive moves on the part of one of Canopy’s competitors, Aurora Cannabis Inc. (TSX: ACB) in recent months, Canopy still finds itself holding the title of Canada’s largest marijuana company at a market capitalization of $7.33 billion as of Monday’s trading.
But with annual revenues of only $21.7 million in 2017, has the company’s valuation gotten ahead of itself or is the +$7 billion price tag the beginning of things to come?
Most reports that have surfaced to date have the size of the recreational marijuana market pegged at somewhere between $5 billion and $10 billion by the time the dust has settled.
To put that number into perspective, at present, Canadian sales of beer were about the middle of that mark, approximately $7 billion, last year.
It’s easy then to imagine how a new multi-billion-dollar market for a recreational drug that some expect could eat into existing sales for alcohol would naturally garner the attention of established alcohol brewers.
This is at least partially why last year one the world’s largest alcohol brewers, Constellation Brands, Inc. (NYSE: STZ), announced that it planned to spend $245 million in exchange for a 9.9% stake in Canopy Growth.
When that deal was announced back in October of last year, Constellation’s CEO Rob Sands said, “Our company’s success is the result of our focus on identifying early-stage consumer trends, and this is another step in that direction.”
It seems that Loblaw Companies Ltd. (TSX: L), the parent company of Shoppers Drug Mart, also holds that same view, as the company has, in recent months, announced deals that indicate it wants to get involved in the retail distribution of the drug.
And now with legalization expected to be less than a few months away, established medical marijuana companies find themselves jockeying for position to secure market share when the drug becomes legal.
That includes recent moves by Aurora Cannabis to acquire not one but two licensed marijuana producers.
Bottom line
A frenzy of merger and acquisition (M&A) leading up to legalization would certainly be welcome news for those currently holding marijuana stocks.
But at this point, it would only be logical that Canopy Growth, in that scenario, would be a buyer rather than a seller, meaning that those looking to speculate on forthcoming M&A deals may be better off looking for smaller, lesser-known names.
But that doesn’t mean that Canopy stock can’t still go higher.
Companies in rapidly changing industries like technology will regularly trade for upwards of five times their annual sales.
If Canopy can be aggressive in maintaining its share of the market and be successful in fending off competitors like Aurora Cannabis and even the likes of newer entrants that also want to own a piece of the “marijuana pie,” it would not be completely unreasonable to see Canopy stock trading at as much as $50 per share before all is said and done.
Stay Foolish.
