This article was updated on July 6, 2017, and originally published on February 6, 2017.
Medical marijuana legalization is picking up steam in the U.S, but in Canada, the marijuana market is white hot, and that's causing shares in Canadian marijuana stocks like Canopy Growth Corporation (NASDAQOTH:TWMJF) to soar to sky-high valuations.
Can this marijuana stock keep climbing?
A bit of backstory
Marijuana remains illegal under federal law in the U.S., but nevertheless, 28 states have legalized medical marijuana, and eight states have legalized recreational marijuana use.
Pro-pot advocates have successfully passed state marijuana laws in part because Americans have taken an increasingly positive view of cannabis, particularly when it's used medically. According to Gallup, 60% of Americans favor marijuana legalization, the highest on record, and an even greater proportion of Americans support medical marijuana.
While marijuana markets are still emerging in the U.S., Canada's marijuana market is more mature. Canada passed national pro-pot laws allowing medical marijuana use back in 2001, and more recently, updated laws governing that market have sparked significant investment in cannabis production by medical marijuana companies, including Canopy Growth.
Soon, Canada's marijuana market may get significantly bigger because Prime Minister Justin Trudeau plans to legalize recreational marijuana nationally too. Once that happens, analysts believe Canada's marijuana market will grow from about $100 million to as much as $5 billion annually.
The first billion-dollar marijuana stock
On the heels of U.S. marijuana victories in key states like California last November, and in the face of Trudeau's goal to legalize recreational market in Canada, investors sent Canopy Growth's stock price skyrocketing in 2016. Investors' bullishness stemmed both from the potential for Canopy Growth to expand its operations into America anditss ability to quickly serve Canada's recreational users.
Recently, worry that marijuana stocks have gotten a bit ahead of themselves has caused Canopy Growth to give back some of its gains. Nevertheless, Canopy Growth's market cap remains above $1 billion, and that's pretty impressive given that it generates limited revenue.
Is Canopy Growth worth an investment?
Canopy Growth competes with Aphria, Inc. (NASDAQOTH:APHQF), but it's the largest medical marijuana company in Canada, and last year's acquisition of another competitor -- Mettrum -- gives it scale it can use to maintain its leadership.
In the company's recently reported fiscal year ending 2017, Canopy Growth's sales totaled $39.9 million, up 214% year over year. Sales were driven by a 203% increase in kilograms sold. Contributing to those results was a 50% quarter-over-quarter sales increase to $14.7 million in its fiscal fourth quarter as average sales prices per gram increased to $8.03 from $7.36.
Clearly, the company's growing fast, and it's likely that growth is going to continue given the potential for recreational use in Canada, and the company's emerging export business to Germany and Brazil.
Canopy Growth is investing in production, marketing, and sales to make sure it gets its fair share of the global marijuana market. It's already operating a 472,000-square-foot former Hershey chocolate factory, and its acquisition of Mettrum brought its production capacity to 665,000 square feet. Recently, it added six new grow rooms in Ontario, increasing its flowering space by one third. It also finished expanding its Bowmanville facility, adding 200% more capacity.
On the marketing side, the company's developing well-known brands, including Tweed, and -- via a partnership with pot supporter and musician Snoop Dog -- Leafs by Snoop. It's also building out its Spectrum Cannabis brand of medical marijuana for sale outside North America, and last quarter, it opened up a new online store, Tweed Main Street, a sector first, that enables registered patients to purchase medicinal cannabis from multiple producers.
Obviously, there's a lot going on at this company, but its billion-dollar valuation may mean that a lot of its short-term opportunity is already baked into its share price -- especially since the company continues to lose money because of its investments. Last fiscal year, Canopy Growth lost $16.7 million, or $0.14 per share.
In order for shares to keep climbing, management will need to significantly grow its sales to a point that justifies the current optimism, provides a pathway to profitability, and offsets its costly expansion plans. If reinvestment continues to cause big losses, investors could sour on the company's stock, and that makes buying shares a risky proposition -- particularly given how new and arguably unfavorable leadership in Washington, D.C. could crimp the opportunity to market its products in America.
Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.