Here’s What Makes Canopy Growth Stock a Solid, Long-Term Cannabis Play

In 2019, Canopy Growth (NASDAQ:CGC) stock hit a high of $52, but that was the end of the good news. The Canadian market would quickly go south as would CGC stock, which lost more than 70% of its value.

Indoors marijuana growing, planting cannabis, holding it in a hand (canopy cgc stock)Source: Shutterstock

The bearish move hit most of the cannabis industry, such as with stocks like Tilray (NASDAQ:TLRY), Aurora Cannabis (NYSE:ACB) and Cronos Group (NASDAQ:CRON).

But lately, things have gotten much better for the company.  Since September, CGC stock has gone from $14 to a high of $56. It trades around $31 now with a $13.4 billion market capitalization.

Of course, one of the catalysts is the election of President Biden.  This may signal more loosening of the laws regarding cannabis.  But there are also notable improvements in the fundamentals of Canopy.

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So let’s take a closer look:

The Comeback

When Canopy was starting to deteriorate, the company’s largest equity holder, Constellation Brands (NYSE:STZ), took swift action, placing one of its own executives, David Klein, as the new CEO. Klein turned out to be the right choice. He brought much-needed financial discipline to Canopy but also deep experience with the CPG (consumer-packaged goods) and beverage alcohol industries.

The latest earnings report definitely shows the progress. Net revenues jumped by 23% on a year-over-year basis – marking three quarters in a row of sequential growth. Adjusted gross margins came to 26%, up from 19% in the prior quarter. The SG&A (Selling, General and Administrative) costs fell by about 15%.

The efficiency efforts are far from over, though. For the next 12 to 18 months, the company expects to see cost savings of between $150 million to $200 million.

Yet Klein has also focused on investing in the product line. For example, the Martha Stewart health and wellness CBD products have seen lots of traction. It has outsold 94% of CBD brands in the U.S. in only four months of the launch.

“Our consumer research shows that 1/3 of Martha gummy purchases were first time CBD consumers, indicating that we are already achieving our ambition with Martha to bring new consumers into the category,” Klein said on the most recent earnings call. “The Martha Stewart CBD collection is now sold in over 580 Vitamin Shoppe locations across the U.S., and we’re focused on further expanding distribution into other brick-and-mortar locations.”

Then there are other products like: Biosteel, a beverage within the Constellation network that has signed sponsorships with the Dallas Mavericks, Toronto Raptors and Philadelphia 76ers; Thisworks, is a set of vaporizer products. There has been strong demand from e-commerce channels; and Suritypro, a line of CBD products for dog health.

Canopy’s strong brands have meant that the company has continued to gain market share in the Canadian recreational market. On a sequential basis, there was a 30 basis improvement to 15.7%, which is the highest in the category.

Bottom Line on CGC Stock

With the runup in CGC stock, the valuation is not cheap. But there should be a premium for the company’s strong market position.

Keep in mind that Canopy expects growth to start ramping up. For fiscal 2022 to 2024, the net revenues are forecast to increase by 40% to 50%. The company also expects to reach positive adjusted EBITDA in the second half of fiscal 2022.

It’s true that the Canadian market has its challenges. There remain supply issues and there are ongoing black market activities, but Canopy has the benefit of top-notch brands and strong distribution. The backing of Constellation is also a huge factor.

So all in all, for investors looking for a long-term play on the cannabis trade, CGC stock looks like a good choice right now.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL.

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