The entire cannabis market in Canada has been rough since recreational legalization commenced in the fall of 2018. A number of issues have affected and slowed the rollout of the industry, such as regulations, political uncertainty a competing black market, lengthy licensing processes, etc.
The market has even been so competitive that some companies have even crossed the line in looking for an edge over their competition. All in all, it’s been a bit of a mess, but there are still a lot of well-positioned companies in the industry.
One of the main issues it will have to manage going forward, however, is the continued political uncertainty across the country, especially due to differing rules province to province.
The political issues alone are a problem, but they have been causing other fundamental issues in the market, such as the undersupply problems the market faced, which quickly turned into oversupply problems.
It has also allowed the black market to stay competitive, and because legal prices remain higher than black market and supply issues continue to de-incentivize buyers, the back market has been a more resilient problem than many initially expected.
Governments have begun to start to realize this. Ontario just recently got rid of its lottery system in a bid to increase the store count, which will end up being positive for the industry and consumers alike. Although this is only in Ontario, it’s a move in the right direction, and more of the same positive steps will be needed throughout the rest of the country.
Canopy has been the industry leader since day one and has continued to be the biggest player in the industry going into 2020.
Its value today is offering investors a major opportunity — especially those who are thinking of the long-run potential. Despite what was a rough opening year of legalization, the opportunity is just scratching the surface, and over the next decade, there will be major evolution and growth.
It even has a venture company designed for all these opportunities in the industry, through its stake in Canopy Rivers. Canopy Rivers is small-cap investment company with a number of strategic investments in the cannabis industry. It’s well positioned for growth, and its synergies with Canopy Growth offer huge potential down the line.
Today, at a market cap of less than $9 billion, Canopy Growth’s price-to-book ratio is less than 1.2 times, and as its revenue continues to grow, this valuation is looking a lot more opportunistic.
Canopy’s position in the market is worth a lot, and its significant influence worldwide is growing now with operations in 12 countries on five different continents.
It’s well positioned to capitalize on the growing extract and edibles segment of the industry as well as the expansion in retail stores through its investment in Tokyo Smoke.
At the moment, Canopy has roughly 25% of the market share for legal cannabis in Canada, which is extremely significant and shows what you are getting with an investment in the giant industry leader.
It’s aiming to grow its gross margins to at least 40% by the end of the fourth quarter in its fiscal 2020 as well as grow its sales to have an annual revenue run rate of more than $1 billion by the same time.
Any investment in the cannabis industry is going to have to be executed with a long-term investment horizon, and no matter how you look at it, the best-positioned stock in the sector to own for the long term is the industry leader Canopy Growth.
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.