For years, the marijuana industry has been all the buzz on Wall Street. That’s because legal weed could become an industry that generates $100 billion, or perhaps even $200 billion, in annual worldwide sales in a decade, according to various Wall Street forecasts.
But at the center of all this is the largest marijuana stock in the world, and the only cannabis stock to currently boast a large-cap valuation: Canopy Growth(NYSE:CGC).
It’s no secret: Investors really like Canopy Growth
There is no shortage of reason Wall Street and investors have placed Canopy Growth on a pedestal above its peers.
For starters, there’s its war chest of cash, which stood at just over $3.4 billion at the end of the fiscal fourth quarter (March 31). This accounts for more than a quarter of Canopy’s current market cap, and derives from the $4 billion cash injection it received from Corona and Modelo brewer Constellation Brands (NYSE:STZ), which closed in November. Constellation holds about a 37% stake in Canopy, and has the potential to boost its ownership to as much as 56% if warrants and convertible notes it holds are exercised.
Canopy Growth also looks to dominate domestic markets, with more than 70,000 kilos of annual supply deals across all of Canada’s provinces. It’s currently one of four growers to have deals in all of Canada. Also, it should slide in as the No. 2 producer in our neighbor to the north, with more than 500,000 kilos of annual output when at full capacity. Aurora Cannabis‘ (NYSE:ACB) more than 660,000 kilos look to be the only number ahead of Canopy.
This is also a company with a strong presence in international markets. Although it, again, trails Aurora Cannabis, which has a presence in 25 countries, Canopy Growth has a production, export, or research presence in 16 countries. These overseas markets could come in particularly handy if and when domestic oversupply becomes a problem in Canada.
Canopy Growth’s premium could disappear
But in spite of its advantages, Canopy Growth has a number of problems, too. In fact, I’d say that its problems should offset much of the premium currently bestowed on the company. Here are five serious concerns that you might be overlooking with Canopy Growth.
1. It’s highly levered to a supply-constrained market
The first thing to realize about Canopy Growth is that it’s predominantly focused on gaining recreational market share. Although adult-use consumers are less likely than medical pot patients to buy high-margin derivative products — new forms of derivatives will launch in Canada by mid-December– the consumer pool for recreational marijuana is much larger than medical cannabis. This sounds like a good thing, until you realize that much of the supply constraints in Canada have to do with supplying adult-use marijuana.