Investors in the marijuana sector are on a wild ride, and those who missed the huge rally in the past year are wondering if the recent weakness in some of the big names is an opportunity to finally get in the game.
Canopy started out as a supplier of medical marijuana. That market is still the main driver of revenue, but the pot of gold investors see at the end of the rainbow is the rapidly approaching launch of legal recreational sales in Canada. In anticipation, Canopy is ramping up production and securing contracts with provincial governments to supply cannabis for their retail operations.
Beyond the demand for the actual plant, Canopy has its eyes on a broad range of potential retail opportunities. The company sold a 9.9% stake to Constellation Brands, which owns Corona, last fall in a $245 million deal that has the two firms working together to develop cannabis-infused beverages. The news gave Canopy a boost of credibility, and Constellation has watched the value of its investment roughly triple.
In addition, Canopy recently announced a deal to buy Kelowna-based Hiku Brands Company Ltd. for $269 million. The move gives Canopy a foot in the door of the growing cannabis lifestyle branding sector. As the legal market opens in Canada, opportunities exist for selling high-end luxury products that are used for cannabis consumption or simply associated with the trend.
Hiku’s Tokyo Smoke division includes coffee shops and has been awarded one of four master retail licenses in Manitoba. The company will initially open 10 stores in that province. Hiku has also applied for retail licences in Alberta.
Hiku’s Van der Pop group focuses on female consumers. This could be a significant retail opportunity if pot culture goes mainstream.
Overall, the cannabis lifestyle opportunities are worth considering, especially if an entire generation embraces the brands. Hiku’s early lead in the segment bodes well for Canopy.
Volatility and valuation
Canopy currently trades for $34 per share at the time of writing. In June it topped $47, but was below $10 at this time last year. Investors should expect to see the volatility continue as the market tries to figure out how much Canopy is really worth.
At the time of writing, the company has a market capitalization of more than $7 billion. This is expensive for a business that still isn’t making money and has annual revenue of $78 million.
Should you buy?
It is hard to justify owning the stock based on the current financials, so you have to be of the opinion that the entire cannabis culture will explode in popularity in the coming years.
If that turns out to be the case, Canopy certainly has the potential to grow into its valuation, and the long-term opportunity is attractive, not just in Canada, but globally, as countries around the world adjust their marijuana consumption legislation.
At this point, however, I would wait for a lower entry point. The stock is showing signs of new strength after the latest drop, but I’m not convinced we have seen the end of the pullback.
Other opportunities might be better bets today.
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 Walker has no position in any stock mentioned.