In this Marijuana Market Update, I respond to another viewer who emailed me about a big name in cannabis stocks: Canopy Growth Corp. (Nasdaq: CGC).
I also touch on an intriguing development in cannabis sales.
Stephen recently emailed me to ask about Canopy Growth:
I follow your channel and appreciate the in-depth analysis. I often come to many of the same conclusions. I have a question regarding CGC: Am I crazy to think this company is severely undervalued based on its network and infrastructure for the future of cannabis?
The company seems to be heading in the right direction and is executing at a faster pace after David Klein became CEO. I don’t agree with the newly announced acquisition of Jetty Vape; however, I understand it. I cannot tell at this point if I am missing something as I have been averaging in using proceeds I have obtained from covered calls. Should I move on from this company? — Stephen
Those are great questions, Stephen. Thank you for submitting them. We’ll send you some Money & Markets gear since we used them!
Canopy Growth Corp. Analysis
Canopy Growth produces and sells cannabis products — both recreational and medical — primarily in Canada, the U.S. and Germany.
The company has also partnered with NEEKA Health Canada to examine the effect of CBD-based therapies on post-concussion symptoms.
Let’s look at the company’s stock performance over the last 12 months.
Markets hammered CGC stock over the last 12 months.
The stock is down around 79% from where it was this time last year. It’s also trading below its 50-day simple moving average.
I believe the drop in share price is due more to headwinds within the broader market and the cannabis industry as a whole. It’s not necessarily based on sentiment toward the company.
We get a good picture of its operations by looking at its total annual revenue.
CGC had a small drop in revenue from its fiscal year 2021 to 2022, at a time when cannabis sales were solid around the world.
However, moving into 2023, projections show revenue hitting $471.7 million — a 10.7% increase from 2022.
By 2024, CGC’s total annual revenue is projected to rise to $540.1 million, indicating strong sales growth for the company in the coming years.
Now, in terms of valuations for cannabis companies, I prefer to look at the price-to-sales ratio. It is a more accurate depiction of a company’s stock valuation. Almost every cannabis company is not making a profit, so I toss price-to-earnings out the door.
As of the end of 2021, CGC’s price-to-sales ratio was 7.77 — the lowest that ratio has been for the company since April 2013, when it was 7.5.
With the recent drop in the market, that ratio is now 4.6, which is the lowest ratio for the company since it started trading on the public market.
Here’s how it stacks up with other cannabis stocks:
- Cronos Group Inc. (Nasdaq: CRON) at 14.8.
- Sundial Growers Inc. (Nasdaq: SNDL) at 14.9.
- OrganiGram Holdings In (Nasdaq: OGI) at 4.6.
- Aurora Cannabis Inc. (Nasdaq: ACB) at 3.3.
- Terrascend Corp. (OTC: TRSSF) at 3.8.
The Takeaway: To answer Stephen’s question, I wouldn’t go so far as to say CGC is “severely” undervalued. However, it is a much better value than a year ago — or a quarter ago.
The company’s valuation is right in line with its peers, and its sales look to be on a solid growth trajectory. CGC reported a trailing 12-month sales growth rate of 17.4%.
Strong headwinds are blowing back all stocks, not just cannabis, and the drop of CGC is like other companies’.
Regarding getting out of the stock, I cannot make that call for you. You must decide if you are willing to see continued drops in the stock price and whether you want to continue buoying your position with covered calls, or even put options.
I hope that answers your question, Stephen.
One last thing before I go.
Cannabis Sales Surpass Starbucks
For the first time, recreational and medical cannabis sales in the U.S. surpassed North American sales of Starbucks in 2021, according to Marijuana Business Daily.
Cannabis sales hit $24.5 billion in 2021, compared to Starbucks’ sales of $23.2 billion in North America. All while cannabis is only legal in 39 states and the District of Columbia, but coffee is legal everywhere.
Starbucks saw its annual revenue grow by 25% last year, compared to the cannabis market growing by 30%.
Just some food for thought.
One more thing: You, like Stephen, can get Money & Markets swag by submitting a question for me, Adam O’Dell or Charles Sizemore that we’ll use in any of our videos. Just send us your questions and feedback.
Where to Find Us
Make sure you subscribe to our YouTube channel and get notified each and every time we post a new video.
We have a lot of great weekly video features on our channel, including:
- Ask Adam Anything — Where I get to sit down with Chief Investment Strategist Adam O’Dell and ask him any question (from you or me) and get his insights into the stock market.
- Investing With Charles — Green Zone Fortunes co-editor Charles Sizemore and I talk about all things related to stocks and the economy, including comparing stocks to give you the best investment advice.
- The Bull & The Bear — Our weekly podcast where I show you the trends and analysis that moves the market.
All these series are on our YouTube channel.
Also, you can follow me on Twitter (@InvestWithMattC), where I’ll give you even more insights, not just in the cannabis market. You can also check out my new Stock Power Daily series on the Money & Markets website. I give you a new stock every day that I expect to outperform the market based on our proprietary Stock Power Ratings system.
Safe trading,
Matt Clark
Research Analyst, Money & Markets