Is Canopy Growth Stock Undervalued or Overvalued?

is canopy stock undervalued
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Is Canopy Growth Stock Selling for Cheap?

Bill C-45 was under review in the Canadian Senate last week, and the market was losing its wits. Top marijuana stocks—most notably Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED) stock—further dipped toward year-to-date lows.

But this price drop has further widened the window of opportunity for investors. We can give you at least three reasons that support the argument that Canopy Growth stock is now selling for cheap.

Just to be clear, marijuana investors were pushed to the edge of their seats on March 22 as Bill C-45 went to a vote in the Canadian Senate. The bill legalizes cannabis for recreational use in the country.

I believe that the proceedings merely hold ceremonial significance. There’s a strong likelihood that the Liberal government will succeed in making good on its promise to legalize pot. But the market is obviously overreacting to the news.

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Mind you, the Liberals and Conservatives had failed to find a consensus, which was causing a holdup in the legalization process. It’s still uncertain when exactly the government will give the thumbs up to recreational pot, so the speculators have been exiting the market in droves.

Obviously, traders don’t leave their money tied up in one bet for too long, which is why regular investors have now been presented with a golden opportunity.

Three Reasons Why Canopy Growth Stock Is Grossly Undervalued

Traditionally, when determining whether a stock is worth buying, analysts tend to begin with price multiples. It’s a quick acid test to determine the overvaluation or undervaluation of a stock. But it’s a shortcut that only works with value stocks. Price multiples are absolutely meaningless in the case of marijuana stocks.

You see, I define marijuana stocks as “hypergrowth” stocks. Marijuana companies are growing at an unprecedented rate amid the rapidly changing regulatory landscape.

To give you an idea how fast this industry is moving now, notice that just two years ago, there were only two U.S. states where marijuana was legal for recreational use. Today there are nine.

The North American marijuana industry is picking up steam and Canada’s legalization of marijuana for recreational use will add a nitrous oxide boost to it.

So, coming back to these high-growth marijuana companies, a rule of thumb for identifying them is to check whether they have sky-high price multiples, negative earnings, new initiatives underway, and plenty of expansionary plans in the pipeline.

Virtually all of the marijuana stocks fit that description. So, to arrive at their true value, the best way forward is to forecast their future growth.

Here are three factors which confirm that Canopy Growth is geared for tremendous growth in the coming years, making TWMJF stock a grossly undervalued marijuana stock today.

Chart courtesy of TradingView.com

1. Too Big to Fail

To gauge a company’s value, I often employ one of Warren Buffett’s investing tips, which is to predict whether the company will be around 10 years from now, and whether it will be in a better position than it is today.

Now, with a market value in excess of $6.0 billion, Canopy Growth is the largest marijuana company, not just in Canada, but in the world. At the pace it’s growing, the company will become a marijuana juggernaut that I would liken to any other proverbial “too big to fail” enterprise.

Canopy Growth now holds a licensed production capacity spanning a whopping 5.675 million square feet. Not a single company in the industry even remotely matches up to it. Here’s a snapshot of its expansion projects underway across Canada.

Canopy Growth’s Cannabis Production Capacity
Facilities (Provinces) Capacity (Sq. Ft.) Anticipated Project Completion (Calendar Year)
Ontario, Quebec, British Columbia, and New Brunswick 5,200,000 2018
Newfoundland & Labrador and Alberta 250,000 2019
Saskatchewan, Ontario, and Quebec 160,000 Licensed to expand

(Source: Canopy Growth Management’s Discussion & Analysis.)

Ask yourself, what are the odds that such a company will go under in the next 10 years? Exactly zero.

Canopy Growth’s financials corroborate this. The company’s sales set a new record in the most recent quarter at $21.7 million, a figure that has never been seen before in the industry.

Plus, the company is slowly moving toward profitability. By improving its production and supply chain processes, theCanopy Growth has managed to cut back on its cost per gram. It is one of the lowest-cost producers in the industry now.

With the company’s top line growing at a robust triple-digit pace and its tentacular expansion underway (more on that shortly), there’s hardly any doubt that Canopy Growth will be holding most of the market share 10 years from now.

2. Top Choice of Local Governments

It’s not hard to see why the majority of the provincial governments in Canada have already struck a supply deal with Canopy Growth.

It is the only marijuana company that has managed to sign a memorandum of understanding (MoU) with all four of the Canadian provincial governments that have begun procuring their cannabis supply ahead of legalization. These provinces are Manitoba, New Brunswick, Prince Edward Island, and Newfoundland and Labrador.

Manitoba, in particular, has allowed Canopy Growth to open four private retail stores in the province. Other provinces will be selling the procured cannabis at government-controlled stores.

Mind you, the Ontario-based Canopy Growth already holds a monopoly in the country’s most populous province and has also recently signed a supply agreement with the second-largest province, Quebec, where it will be supplying 12,000 kilograms of marijuana every year.

Long story short, Canopy Growth is the top choice of provincial governments in Canada and is miles ahead of all of its immediate competitors in the country. This bodes well for the future of TWMJF/WEED stock.

3. Growing Like a Weed

Outside Canada, too, Canopy Growth has set all its wheels in motion.

The company is now active in seven countries across four continents (North America, Australia, Europe, and South America). These include the fast-growing cannabis markets of Germany and Australia. In Germany alone, the company sold $1.0 million worth of marijuana in the most recent quarter.

Canopy Growth’s expected acquisition of Spain’s Alcaliber, S.A. is the next big thing that TWMJF/WEED stock investors are banking on. Alcaliber is one of the largest producers of narcotic drugs in Spain and the company occupies a unique position in the European market as a top exporter.

If Canopy Growth succeeds in closing this deal, it will be a grand slam victory. Alcaliber will open up new sales channels for Canopy Growth in Europe, establishing it as one of the most potent marijuana players in the region.

Analyst Take

Sell when others are greedy, buy when others are fearful. That’s one golden rule of investing. It’s what made investment maestro Warren Buffett one of the most successful investors of all time, helping him amass billions of dollars.

After the top marijuana stocks took a plunge in the aftermath of the hold-up in legalization in Canada, investors have been presented with an opportunity.

Canopy Growth is hands down the best marijuana bet out there. Given its recent price drop, Canopy Growth stock is a steal.