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Will Legalization Send Canopy Growth Corp. (TSX:WEED) Soaring?

Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) closed at $47.76 June 21, up from $8.56 a year before. This explosive growth might seem impressive, but it’s not out of the ordinary for cannabis stocks. Aurora Cannabis Inc. (TSX:ACB) has seen similarly strong growth, trading in the $10 range (compared to $2.19 this time last year).

“Cannabis stock euphoria,” as some have called it, is in full swing. And Canopy may be the biggest beneficiary. With a market cap of over $9 billion at the time of this writing, the company has a truly global reach. In addition to core operations in Canada, the company has a subsidiary in Germany and does business in Jamaica, Chile, and Australia.

Legalization presents new opportunities

Canopy has long supplied medical cannabis for the domestic market. But with legalization all but finalized, a whole new horizon of opportunity has opened for the company. On October 17, recreational cannabis will be fully legal across Canada. This presents a massive opportunity for Canopy, which could potentially increase its sales by tapping into the recreational part of the market.

A survey by Deloitte estimated that about 22% of adult Canadians use marijuana recreationally. From this figure, the firm estimated the size of the recreational cannabis market to be about $8.7 billion—though it must be stated that black market revenue estimates are imprecise.

Strong revenue growth

Canopy had revenues of $39.9 million in fiscal year 2017, a 214% increase over 2016. The company sold over 5,000 kilograms of cannabis-containing products and harvested over 10,000 kilograms. These are already sizable figures. But the recreational market for cannabis and related products is even larger than the medical market: $5.7 billion was spent on medical marijuana last year compared to the $8.7 billion Deloitte estimates for the recreational market.

And there are strong signs that Canopy will indeed expand into the recreational market as legalization comes into effect.

In a news release dated June 20, 2018, the company praised advocates and elected officials who made legalization happen and concluded by stating, “here’s to the next chapter of growth.” While not outright saying it, the wording seems to imply that Canopy executives anticipate significant growth from the coming legalization. Canopy’s subsidiary, Tweed, has a page dedicated to legalization on its website–another sign that the company is looking to expand into the recreational market.

Whether Canopy stocks will gain from all this remains to be seen. But all signs indicate that the company is anticipating significant growth from the changes coming on October 17.

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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 contributor Andrew Button has no position in the companies mentioned.

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