How High Can Canopy Growth Corp (TSX:WEED) Go?

Canopy Growth Corp (TSX:WEED)(NYSE:CGC) is already the leading firm in a nascent industry. If it can preserve its dominance, and if more countries across the world replicate Canada’s move to legalize weed, the company could make $50 billion in annual sales by 2030.

| More on:

Piper Jaffray analysts re-rated Canopy Growth (TSX:WEED)(NYSE:CGC) on Friday and raised its stock price target from US$40 to US$60. The company believes the near-term prospects of the legalized marijuana market in North America justify the new valuation.

A 50% rise in the target price from one of the most well-known and prestigious Wall Street investment banks is a big deal. Canopy’s stock popped by as much as 10% on the news. Now, the stock trades at US$48.5, indicating upside of nearly 20%.

In their research note, the analysts say they expect the global market for marijuana to expand by double-digit percentages every year for the foreseeable future. They estimate the global recreational and medical market could be worth as much as US$500 billion over the long term or close to US$50 billion in the near term.

At the moment, Canopy’s annual sales are a little over US$100 million, while the company’s market capitalization has just crossed US$16.6 billion. In other words, the stock is trading at a price-to-sales (P/S) ratio of 166.

That P/S ratio doesn’t seem silly when you consider the fact that the company’s last reported quarterly earnings were for a period that ended on September 30. Recreational weed sales were officially legalized in Canada on October 17. So, this upcoming quarterly report will be the first glimpse at how much money Canopy can generate from its products.

In fact, I think most investors will have to wait a few years to see the true potential of the legal marijuana industry across the globe. If the legalization drive is successful in Canada, and if there’s a move towards legalization on the federal level in America after the 2020 presidential election, the global weed industry could be in for a massive windfall.

However, Canopy Growth will have to expand sales by an order of magnitude to justify its current valuation. I’ll make a few assumptions based on Piper Jaffray’s estimates. Assuming the market is worth US$500 billion by 2030, Canopy captures 10% of this market, and the average alcohol or tobacco company trades at a P/S ratio of five, the company’s valuation works out to $250 billion, or $1,077 per share.

That’s an impressive return of 15 times over a period of 12 years, or 25% compounded annual growth. In my opinion, that sort of growth can justify the near-term risks of holding Canopy’s stock.

However, Canopy will need ongoing support from Constellation Brands to bolster its distribution network, an uninterrupted wave of marijuana legalization across the world, and a strategy to preserve net margins to achieve this growth.

Bottom line

Canopy is already the leading firm in a nascent industry. If it can preserve its dominance, and if more countries across the world replicate Canada’s move to legalize weed, the company could make $50 billion in annual sales by 2030. That would justify its current valuation.

However, long-term investors need to brace for near-term volatility and keep a close eye on the company’s next quarterly earnings report, which is due on February 14.

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 Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Investing

how to save money
Investing

The Best TSX Stock for Canadians to Buy With $1,000 Right Now

iShares S&P/TSX 60 Index ETF (TSX:XIU) could be a great starter investment for new investors in Canada.

Read more »

Canadian dollars are printed
Dividend Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Toronto-Dominion Bank (TSX:TD) stock could do well in the year ahead.

Read more »

monthly desk calendar
Dividend Stocks

Monthly Income: Top Dividend Stocks to Buy in November

Here are two of the best monthly dividend stocks in Canada you can buy in November 2024 and hold for…

Read more »

hand stacks coins
Investing

A Top TSX Stock to Buy Now for Real Wealth Later

Intact Financial (TSX:IFC) stock is a fantastic dividend-growth play for the next 15 years and beyond.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 14

The U.S. wholesale inflation data and Fed chair Jerome Powell’s remarks about the economy will remain on TSX investors’ radar…

Read more »

Man data analyze
Tech Stocks

3 Reasons Celestica Stock Is a Screaming Buy Now

These three reasons make Celestica stock a screaming buy for long-term investors.

Read more »

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Earn Ultimate Passive Income

If you have a TFSA, then you have the key to creating ultimate passive income. All you need is a…

Read more »