The world's largest cannabis company – Canopy Growth – has seen its share price, awareness and valuation soar in the last couple of weeks. Is this all hype, or is there a method to the madness happening out there in the stock markets?
Let's dig a little deeper, shall we?
"If you want to lead…you cannot come second."
– Bruce Linton, Chairman, and CEO, Canopy Growth
Canopy is a company of firsts.
The first cannabis company to list on the CSE, the TSVX and finally, the TSE. The first company to be valued at $100m. The first to be valued at a billion. They were the first to buy out another cannabis company and the first pure-play cannabis producer to list on the NYSE.
The first to get a significant investment from one of the Big alcohol, tobacco and pharmaceutical companies, and the clear and undisputed market leader in all areas of measurement, including: revenue, grams shipped, number of active patients, number of supply agreements with the Canadian Provinces, and importantly, the largest inventory on hand, ready for the recreational boom come October 17.
The booming marijuana market is picking up pace and, little by little, the prohibition of cannabis is being lifted across the planet. The world's oldest known medicinal plant, is becoming the pharmaceutical industries' newest darling.
The marijuana green rush is in full swing. This is not just about people smoking marijuana, this is new paper, biofuels, medicine, cotton, plastic, and food, to name just a few of the mega-industries set to be disrupted by the Cannabis plant.
And this is not just happening in the US and Canada. This is a global tsunami of green, flowing across the world.
The only place Canopy Growth wants to be though, is #1
They leverage the past, prepare for the present and plan for the future…continuously.
Canopy currently operates in 11 countries spanning 5 continents. They have partnerships in Brazil, Chile, Denmark, Spain, Columbia, Germany, and Australia.
They have actual production facilities on the ground in Columbia which will act as the supplier and producer to the Latin America market, while in Chile where the Research and Development Hub is based, they are focused on advances in medicinal IP that will later be both protectable and commercial.
They have very strong distribution coverage in Europe's largest market – Germany and its 80 million population – and when you add (and overlay) this with Constellations Brand's global distribution footprint, you start to get a sense of why Canopy is so well placed for the oncoming global green rush.
Canopy is "built on brands". The diverse brands that are "under the canopy" allows them to effectively deploy brands that are targeted towards specific customer demographics and type, reasons for use, and product form factors.
In other words, they have a brand, division and/or product that can satisfy any customer (medicinal or recreational) with any type of product (flower or extract) and be able to take it in any form (oils to edibles…and everything in between)
Canopy was the first to acquire another cannabis company when, in 2017, they bought Metrum Health for $430 million (at the time, the biggest ever deal in the Cannabis Industry).
This was a smart buy and gave them instant scale in the number of brands (Spectrum in particular) they had available to sell, and, it greatly increased production capacity external to their founding Smith's Falls facility (more on that later).
They also bought Bedrocann, and with it, 20 years of Netherland's based, Dutch-style, greenhouse knowledge and technology. So much so, that they can produce indoor grown cannabis for less than the cost of pure Greenhouse production. That's extraordinary.
On the recreational front, their deals with Snoop Dogg and DNA has positioned them very cleverly at the epicenter of the recreational movement and culture. Their recreational brand – Tweed – is one of the most recognised marijuana brands in the world.
Canopy realised early on, that there were going to be a variety of smaller brands selling and distributing marijuana to the medicinal and recreational markets, and so they developed the market leading, online portal, Tweed Main Street.
The platform allows smaller companies access to online sales (as Canopy has the most number of active patients), while Canopy clips the ticket of additional sales that would otherwise have existed outside of its eco-system. Main Street now has brick and mortar dispensaries too.
Canopy Health Innovations (a wholly-owned subsidiary of Canopy Growth) is the pharmaceutical side to Canopy. They understand – clearly – that the real wealth is going to be made in the advances in science and medicine and the impact of the Cannabinoid compound on every area of the human body.
Essentially, Canopy Health will convert formulas to tested products and Canopy will then commercialise those products. I think CHI has huge, huge upside to it. They recently did a deal with the Beckley Foundation (Beckley Health) and have seriously strengthened the management team and advisory boards.
They are creating very rich, protectable, genetics and IP to ensure future differentiation and profitability.
And finally, there's Canopy Rivers (RIV.V). Canopy Rivers is an eco-system of companies in a vertically-integrated chain. Canopy Growth is the cornerstone investor with 29% of the listed company.
Think of Canopy Rivers as a global incubator for companies operating in the cannabis industry, looking to gain predictable/contractual cash flows and operational support.
Canopy Rivers invests in these businesses with a mixture of equity, debt and/or royalties. They provide the companies with financial benefit, management support, and operational excellence.
And each new company added to the ecosystem strengthens the eco-system itself.
Canada will become the first ever G-7 nation to legalise the adult use of marijuana at the federal level on October the 17th (that's 10 days away). Demand is going to completely outstrip supply in the early days and everyone is running around trying to ready themselves for the big day.
No one is as prepared as Canopy. They've got Canada covered.
Canopy has secured supply agreements with all 11 Provinces (Ontario will be online-only for the first 12 months). Their product range will be featured to over 88% of the Canadian population come day 1, and they are the best equipped to meet the oncoming recreational demand.
They currently operate 12 cultivation and production facilities across Canada. 2.4 million square feet of production in operation with a further 3.2 million square feet of production capacity under development (and due to be completed in late 2019). 500,000 square foot of this is fully European-GMP certified (which is critical in order to export to Europe).
They have 10 licenses to cultivate and 8 licenses to sell under the ACMPR, and with their 5.6 million square feet, they are the world's largest producer of marijuana.
Out of all of this capacity, it's their first production facility that's by far the most famous.
Tweed, the Smith's Falls facility located at 1 Hershey's Drive, is the site of the old Hershey's Chocolate Factory. Not that one could find any connection between weed and chocolate, but now, just like Charlie, people can go and tour the "chocolate factory".
As part of the expansion of the facility (by another 220,000 square foot), they are also putting the finishing touches on the Tweed Visitor Experience Centre.
A building dedicated to knocking down the walls of misunderstanding surrounding the cannabis plant, and one that celebrates Canopy's birthplace. Visitors can now walk across the old Hershey catwalk, except they are not watching chocolates being made beneath then, but rather…cannabis…and lots of it.
It's a matter of demand.
A new report recently estimated that Canada's recreational demand is going to be just north of 926,000kg in the first year (that's a lot of weed). No one can handle this level of demand (yet) but the big players have all been stockpiling for the past several months in anticipation of October.
In their latest Q4 financial reports, Canopy showed $118 million of inventory on hand (the highest in the industry). Canopy does not give clear guidance on exactly how many kilograms of stockpiles it has, but we do know from Aurora, that they have a production capacity of 570,000kg per annum with their 4.5m square feet of production capacity. So following the ratios, Canopy's 5.6m square feet should be able to generate ~710,000kg of cannabis per annum.
They also acquired Hiku Brands in early August and with it, the undisputed market-leader in recreational cannabis. Hiku brings their award-winning recreational brands Tokyo Smoke, DOJA and Van Der Pop (focused on female users) to the Canopy Table. This greatly strengthens their recreational offering and places them even further ahead in the race to reap the rewards of legalisation.
When the Canopy-Constellation II news was announced, I wrote a post on why this was such a big deal. And a big deal it was. The CAD$5 billion deal effectively gives Constellation control over Canopy Growth. They now have 4 of the 7 board seats, and should they execute warrants in hand for another $5 billion and change, then they would own 52% of Canopy.
Because let's be honest, there are cannabis companies, some of whom are quite well run, and then there is a proven beast like Constellation Brands (NYSE:STZ).
The deal is game-changing for Canopy and the industry. First off, it's the biggest vote of confidence anyone in the industry has ever shown. Secondly, it gives Canopy access to Constellations distribution footprint, operational know-how, and most importantly, political nous.
But the real key could be the fact that Canopy now has a $5bn+ warchest earmarked almost entirely for the USA. And this is where Constellation creates a synergistic partnership.
The reality is we are looking at 3-5 years of turbulence on the regulatory side in the US, and that means experience on that side is essential and could create advantages that cannot be made up easily regardless of how good an operator is or how best-in-class their cannabis is.
Constellation is a highly sophisticated, experienced and skilled operator when it comes to regulations and this could be the key to them figuring out how to replicate their previous success when it comes to winning through government interaction, lobbying and shaping regulation, and then building a business around it.
Back to the Future
The company leads the way with Quarterly revenue of $22.8 million (Aurora is next highest at $19 million) and has shown very strong growth in patient numbers and international sales.
People often ask me: "Is there any stock I could recommend as a buy and hold for many years?"
I cannot recommend anything to you, but I can tell you this. If I were looking for 1 stock to buy and then put in my draw and hold for the next 10 years – it would be Canopy Growth. I believe them to be the true market leaders and for three very good reasons.
Their market share of Canada – they are the undisputed heavyweight of the Canadian market. They have every province covered and already have both online and offline distribution in place. Their Hiku driven recreational strategy is best0-in-class and they have more production capacity than anyone else.
Their international growth – with export agreements to Australia, Brazil. Denmark, Spain and Germany, and with their joint ventures in Latin America that look set to dominate the continent, no one is better placed for the globalisation of marijuana (although to be fair, Aurora could claim to be as "globalised" as Canopy, thanks to their recent shopping sprees!).
And finally, their partnership with Constellation, which has provided them with the ultimate war-chest for when America does eventually open up legislatively. This and their stellar management team, led by the industry poster boy for Cannabis – Bruce Linton – positions Canopy at the front of the pack and packs enough fuel for them to lead the race for many years to come.
The stock is on a run. Canopy Growth's share price has more than doubled (102.7% up to be exact) since its well-publicised listing on the NYSE back in May. This week, an analyst from Benchmark has put out a BUY rating on Canopy with a price of $77.24 (at the time of writing Canopy is currently trading at $61.49).
With a market cap of $14.5 billion (based on the above share price), Canopy is certainly not cheap. Not at all. However, with its solid management, global partners, and the fact that it is so cashed up, I believe Canopy has some way to grow!
If you're looking to initiate a position, then one of the smarter plays might be to dollar average cost in. This means buying smaller positions as and when the stocks pull back so that you end up with a lower-averaged cost base.
We're buying Canopy under $65.