Reality Check on Marijuana Pricing

Article by Peter Clausi, Investor Intel

Reality Check on Marijuana Pricing

Canopy Growth Corporation, Canada’s largest and best known licenced producer of medical marijuana, recently announced its third quarter financial results. Revenue for the quarter was $9.8 million, a 15% increase over Q2.

Let’s assume revenue continues to grow at that 15% pace over Q3 and then again in Q4. (Given production issues, it’s unlikely those numbers will be hit, but for this exercise let’s assume they are.) That means a fiscal year of revenue of $42,000,000. The cash flow number is impossible to predict with any accuracy.

That’s a very impressive revenue number, especially for a heavily regulated, capital intensive business that was only incorporated in 2009. CEO Bruce Linton and his team have done a tremendous job of efficiently growing the company. The shares have real value.

But investors have to step back and see the bigger picture, and try to determine what that value is. Remember that the year low was $2.40 a share and the year high was almost $18. At last week’s close of roughly $12.60 a share, the market is valuing Canopy Growth at over two billion dollars, or almost 50 times the current year’s projected revenue. Rational markets don’t act that way.

For those of you counting on the Liberal government to decriminalize marijuana, which would allow Canopy Growth to sell to the broader non-medical Canadian market, please check out the timeline for the implementation of that agenda. In short, we can expect the legislation to be introduced in Parliament this year (probably April), with a resulting small bump in marijuana valuations, but it will be years before that legislation wanders its way through hearings, consultations, committees, revisions, legal challenges, the Senate and three readings in the House.

Marijuana may not be decriminalized for years, which means CGC’s ability to earn revenue from it is also years away. When you value the company, a savvy investor must underweight any value given for revenue from decrim in 2018 or 2019 or must be prepared for more of the $2.60 to $18 swings.

Read full article here.

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