The long overdue rebound in marijuana stocks is finally here. The cannabis sector, led by the segment’s most important company, Canopy Growth (NYSE:CGC), are breaking out in early 2020. Investors are betting that the demand and legislative troubles of 2019 will fade, and the whole industry will rebound in a big way over the next several quarters.
This isn’t a small breakout, either, but a material one: Canopy Growth stock is already up 12% in 2020. That’s basically 1% growth every trading day and represents the most upward momentum this stock has seen since early 2019. And it’s worth noting that the move has also been on big volume, so there appears to be a lot of money out there staking big on a huge CGC turnaround.
That’s the good news for bulls. Here’s the better news — this big Canopy Growth stock turnaround will only get bigger as we go deeper into 2020.
In a nutshell, favorable fundamental developments in the cannabis market will spark a significant growth trend reversal for Canopy over the next few quarters. This growth trend reversal will converge on what is still a very beaten-up and relatively discounted CGC stock. That convergence will spark a huge rally in shares to levels north of $30.
Here’s a deeper look.
Favorable Fundamentals Will Develop in 2020
Thanks to weakening fundamentals in the global cannabis market, Canopy’s growth trajectory meaningfully slowed in 2019. I think that will change in 2020. Cannabis market fundamentals will strengthen and Canopy’s growth trajectory will meaningfully improve.
This thesis breaks down into three components: revenue growth re-acceleration, profit margin stabilization and net loss reduction.
First, the introduction of new products like vapes and edibles into the Canadian market, coupled with significant legal retail footprint expansion, will re-ignite demand growth throughout Canada’s legal cannabis market over the next few months. At the same time, Canopy Growth will aggressively pivot into the U.S. market with its First & Free hemp product line. Canadian legal demand revival coupled with new U.S. revenue streams will improve Canopy’s revenue growth trajectory in 2020.
Second, as demand trends in Canada improve in 2020, demand will finally start to catch up to a supply glut in the market. This will lead to more favorable market pricing and higher gross margins for Canopy Growth. Simultaneously, Canopy’s 2019 production facilities will start to produce at capacity in 2020, which will also provide a year-over-year margin boost. Net net then, Canopy’s 2019 margin headwinds could turn into 2020 margin tailwinds.
Third, the combination of revenue growth re-acceleration and profit margin stabilization will lead to Canopy reporting narrower losses. That’s a big deal for a hyper-growth, unprofitable company that needs to inch towards profitability in order to justify its valuation.
Canopy Growth Stock Will Soar
Because of the three aforementioned fundamental improvements, CGC is set to soar in 2020.
The logic is pretty simple. Investors once believed that Canopy would emerge as the top dog in an ultra valuable global cannabis industry. But slowing growth and profitability concerns clouded that bull thesis, and ultimately knocked shares down to $20. Those slowing growth and profitability concerns will ease significantly in 2020. As they do, investors will start to once again buy into the idea that Canopy is going to emerge at the top dog in a huge global cannabis industry.
The last time investors believed that, Canopy Growth stock was up at $50. Shares could make a run for that level again as investors once again adopt this bullish mentality amid re-accelerating growth, stabilizing margins and narrowing losses.
The numbers are pretty simple, too. Under the paradigm that Canopy will leverage its unparalleled size, resources, partnerships, and distribution to turn into the Altria (NYSE:MO) or Anheuser-Busch (NYSE:BUD) of a several hundred billion dollar global cannabis industry at scale, I think that Canopy reasonably projects to earn $5 in profits per share by fiscal 2030.
Based on a forward earnings multiple of 16 and a 10% annual discount rate, that implies a a 2020 price target for Canopy Growth stock of about $33 to $34.
Bottom Line on CGC Stock
CGC had an awful 2019 amid deteriorating cannabis market fundamentals. Shares will bounce back in 2020 amid improving cannabis market fundamentals. This rebound has already started in the first two weeks of 2020, and will continue for the balance of the year. Ultimately, Canopy Growth stock will head way higher over the next several months.
As of this writing, Luke Lango was long CGC.
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