Is Constellation Right About Canopy Growth Stock?

Vince Martin - finance.yahoo.com Posted 5 years ago
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Last year, Canopy Growth (NYSE:CGC) transformed the marijuana industry — and marijuana stocks — by garnering a billion-dollar investment in CGC stock from Constellation Brands (NYSE:STZ, NYSE:STZ.B).

Is Constellation Right About Canopy Growth Stock?
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The $4 billion deal was the first major investment in cannabis by an established consumer company. Tobacco giant Altria (NYSE:MO) would follow suit by taking a stake in Cronos Group (NASDAQ:CRON). Simply put, Constellation’s investment legitimized the cannabis space. The question now for CGC stock, and other marijuana stocks, is valuation …

Constellation invested in Canopy Growth at an effective price below $35 per share (depending on how an investor values the warrants the company acquired). CGC stock unsurprisingly soared on the news — and after some volatility, touched $50 earlier this year.

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I argued back in February, near those levels, that Canopy Growth stock looked overvalued. Back at $43, I still think that’s roughly the case. But Constellation Brands clearly feels differently, and it made the case for CGC in conjunction with its earnings report on Thursday.

Constellation and Canopy Growth Stock

There wasn’t a lot of news in Constellation earnings when it came to Canopy Growth. As detailed on the Q4 conference call, Constellation reports its equity earnings on a delayed basis. So the $16.5 million loss Constellation took in the quarter is based on Canopy’s Q3, which already has been reported.

That said, Constellation management discussed its outlook for Canopy Growth. There wasn’t much in the way of new developments, but what commentary there was suggests progress is being made at Canopy.

Most notably, Constellation CFO David Klein reiterated guidance for Canopy to exceed $1 billion in net sales next year (fiscal 2020). Analysts still don’t quite believe the executive: the consensus revenue estimate for next year is just $828 million. If Constellation is right — and it’s certainly closely involved in Canopy’s planning — CGC stock could see upside as those estimates come up.

Constellation management also detailed a number of initiatives underway at Canopy Growth. Brick-and-mortar stores are coming online. Vapes and beverages are on the way in the fall.

At least per Constellation, it seems like 2019 will be a busy year for Canopy Growth. As such, the Q4 call from Constellation felt like a preview of the commentary that will accompany CGC earnings, likely due in June.

Is It Enough for CGC Stock?

For what it’s worth, investors didn’t see the commentary as ground-breaking. Canopy Growth stock traded flat on the day, despite a nice rise in Constellation shares.

And from here, the core problem still remains. The story here remains attractive. Canopy Growth has more capital than any of the other marijuana stocks. It still looks like the sector leader. Revenue is going to grow exponentially: Constellation’s target for Canopy’s fiscal 2020 sales suggests revenue will quadruple next year.

There’s a huge opportunity here. But there’s also a huge valuation. Even the $1 billion target suggests a 10x forward price to revenue multiple. Canopy Growth still is a few years from being profitable.

And like most marijuana stocks, there’s still the argument over just how profitable the business will be. Manufacturing traditionally is a low-margin business. As legalized sales expand, the product could become commoditized and prices could plunge, as has been the case in U.S. markets like Oregon and Colorado. I personally still am not convinced that marijuana, as an industry, will be quite as attractive as the valuation of marijuana stocks suggest.

Still, there’s a case. And admittedly investors more bullish on marijuana stocks should take a long look at CGC, as I’ve written before. Certainly, Constellation thinks it executed a great deal — and if its management is right, the recent declines in Canopy Growth stock soon will reverse.

As of this writing, Vince Martin has no positions in any securities mentioned.

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