Canopy Growth Ready to Sprout
Since Canada enacted national legislation in October 2018 to broadly legalize marijuana and cannabis derivatives for general use, and as the number of US states with similar laws has continued to climb, North America has become the scene of a new cannabis industry. But marijuana is more than just a social fad or a suddenly trendy business opportunity. For major investors, it’s also big money, and from the investors’ perspective, legalization has simply removed an element of risk.
The risk, remains, however, as in any endeavor into new markets. In recent months, Canopy Growth Corporation (CGC – Research Report), a major player in the cannabis industry, has come under scrutiny from some of Wall Street’s best analysts. We can dive into TipRanks’ database to examine both the analysts’ reviews and the company's stock position, to get a feel for the state of the cannabis market.
The company is traded on both the NYSE, under the ticker CGC, and on the Toronto Stock Exchange as WEED. Canopy’s $14 billion market cap makes it the largest cannabis company in operation, and its focus is the production and distribution of cannabis and cannabis products for recreational uses.
Canopy recently received a massive boost, when brewing giant Constellation Brands (STZ) expanded a move to buy a 9.9% stake in Canopy into an eye-opening 38%, a move that included a $4 billion cash infusion into the Alberta-based marijuana company. The move came just ahead of Canada’s legalization, and Canopy’s president, Bruce Linton, has indicated that the funds will go toward international expansion and new product development.
Cowen analyst Vivien Azer (Track Record & Ratings), sees Constellation’s acquisition of such a large piece of Canopy as part of a larger picture. Casting her eye on the marijuana market as a whole, she sees an early-stage industry poised for rapid take-off; she predicts that buying legal marijuana will get easier as more US jurisdictions join Canada and the ten states that already have legalization, and as companies like Canopy increase their production and supply. While she doesn’t set a firm price target, she gives the company a buy rating and takes a bullish stance toward future sales increases, as more states move to legalize or decriminalize marijuana.
Writing from Canaccord Genuity, Matt Bottomley (Track Record & Ratings) agrees with Azer’s rundown on the company and gives CGC a buy rating with a price target of $52. This suggests an upside of 20% for Canopy Growth.
There has been a sour note recently in the general good news around Canopy. In February, the company reported a key mistake in its Q3 earnings, saying that there had been a “spreadsheet error” in the report resulting in an $86 million correction. To make matters worse, the error was reported at 11pm - an apparent attempt to avoid the scrutiny of the daily news cycle - and the company made no comment other than to say it was a “formula error” in the spreadsheet. The lack of transparency was worse than the actual error.
Analyst Martin Landry (Track Record & Ratings) of GMP FirstEnergy was not so easily appeased by the company statement. After Canopy’s admission, he lowered his price target to $49, and reduced his stance on the stock to a hold. The mistake raises serious questions, most notably, how did this get past the accountants, and can Canopy’s numbers be trusted in the future.
It is important to note, however, that reservations about Canopy are not about the company’s business prospects; it is possible that Canopy can restore its reputation with more transparent future reporting.
Overall, Canopy Growth has a ‘Moderate Buy’ on the analyst consensus, based on 2 buy and 2 hold ratings in the past three months. The stock is traded on both the NYSE and the TSE; it’s average price target in US dollars is $49, which is C$67 in Canadian currency. This gives CGC a 15% upside to the current share price ($43 and C$58).
View CGC Price Target & Analyst Ratings Detail
