Canopy Growth (TSX:WEED) (NYSE:CGC) recently surged above $60 per share, and investors who follow the cannabis company are wondering how high the stock could eventually soar given the mania around the marijuana space.
Canopy is the current leader in the marijuana sector. At the time of writing, the company trades at $57 per share and has a market capitalization of more than $12 billion.
The news that sent the stock to the latest high was the all-in bet by Constellation Brands (NYSE:STZ) on the future of cannabis-infused drinks. Constellation produces beer, wine, and spirits, including Corona. The company dipped its toes in the marijuana pool last fall when it bought 9.9% of Canopy for about $245 million. The announcement that it has agreed to invest another $5 billion to take its stake in Canopy to 38% is nothing short of a full-blown cannonball off the high board into the deep end of the marijuana market.
The price of $48.60 per share Constellation agreed to pay in the latest investment is mind boggling by any logical measure, especially given Canopy’s current numbers. In the most recent quarter, Canopy reported revenue of about $26 million and a net loss of $90.8 million.
Here’s the thing. The gang at Constellation isn’t a bunch of newly-minted tech billionaires willing to take a high flier on a new fad. Constellation has been around since 1945, and the management team knows the industry very well. Fear of missing out might have had a part to play, and the bet could go sideways, but investors have to also consider the fact that these guys know what they are doing.
If things turn out as Constellation anticipates, countries around the world will follow Canada’s lead to make the consumption of cannabis products legal. In the beverage segment, consumers could quickly decide that cannabis infused drinks are more appealing than ones that contain alcohol. If that happens, there could be a tectonic shift in the drinks market. For a beer, wine, and spirits producer, that’s a scary and exciting scenario.
In the beverage opportunity alone, it is easy to see why Constellation decided to be the first big drinks player to get a foothold in the sector, and it could turn out to be a very cheap way to get a global jump on its competitors. This doesn’t take into account all the other retail opportunities in the cannabis market, including edibles, high-end products, clothing, and other potential high-margin segments.
Interestingly, the marijuana smokers are the least exciting part of the big picture, even though that’s where it all started.
Is Canopy headed to $100?
Ongoing volatility should be expected, especially in the near term. That said, I wouldn’t be surprised to see Canopy go to $100 per share in the next couple of years if it remains independent. My suspicion, however, is that Constellation will simply buy the rest of the company before the stock goes that high.
At the time of writing, Constellation has a market capitalization of US$40 billion, so it is big enough to do the deal.
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.