Could Canopy Growth Could Become Larger Than Constellation Brands?

Thinking big isn't a bad thing. And Canopy Growth (NYSE: CGC) CEO Bruce Linton is definitely thinking big.

Linton recently stated at the Cantech Investment Conference that his goal is to make Canopy's business "quite a lot larger and more successful" than its partner, Constellation Brands (NYSE: STZ). The alcoholic-beverage maker, which invested $4 billion in Canopy Growth in late 2018, made more than $8 billion in revenue over the past 12 months. Canopy Growth made a little over 1% of that total during the period.

But Linton thinks "it's not completely unrealistic" that Canopy Growth will one day be bigger than Constellation. Is he right -- or is he perhaps consuming a little too much of Canopy's products?

Image source: Getty Images.

What it would take

For Canopy Growth, it's not quite as simple as increasing its annual revenue to more than $8 billion to become larger than Constellation Brands. Remember that Constellation should grow, too.

Over the past five years, the Corona beer maker has increased its revenue by a compound annual growth rate (CAGR) of 12%. However, Constellation's growth will probably slow down somewhat in the future. The company's wine and spirits business weighed on overall performance in the third quarter and could continue to do so.

Still, though, Constellation expects to increase sales over the next several years by mid- to high single digits annually. If we use a CAGR of 8% and project it out five years, the company's revenue would be close to $11.75 billion. If we went out 10 years using that same growth rate, Constellation's revenue would total more than $17 billion. And 15 years from now, the company would make more than $25 billion annually.

Constellation itself thinks the global cannabis market will reach a little over $230 billion over the next 15 years. For Canopy Growth to be larger than Constellation by that point, the marijuana producer would need to capture nearly 11% of the global market. 

Can Canopy do it?

Now that we've established what it would take to achieve Linton's goal, let's examine how realistic it is to expect that Canopy Growth can pull off the task. Reaching the goal just might be more doable than you think.

Constellation did its own number-crunching before it ponied up $4 billion to increase its stake in Canopy Growth. The alcoholic-beverage company thinks Canopy will grab between 30% and 40% of the Canadian marijuana market. That seems quite possible, considering Canopy's production capacity and solid supply agreements with all of Canada's provinces. 

However, Canada's addressable marijuana market is projected to be around $11 billion within the next 15 years. The big challenge for Canopy Growth in becoming larger than Constellation Brands is to succeed in the rest of the world.

Constellation estimates that Canopy can pull in a market share between 5% and 15%. Unfortunately, hitting the midpoint of that range won't be enough for Canopy to grow larger than Constellation unless the global marijuana market expands more quickly than expected.

But Canopy doesn't have to beat the midpoint of Constellation's projected market share range by very much to be on track to top its partner's annual revenue. It won't be easy, but there's a decent chance that Linton's view that Canopy could be larger and more successful than Constellation in the future just might be on target.