The marijuana industry is growing at an absolutely incredible pace. ArcView, a leading cannabis research firm, has projected that sales in North America could reach almost $22 billion by 2021. Between 2016 and 2021, we're talking about an annualized growth rate of 26%! Any industry that can grow by an average of 26% and presumably push into profitability is bound to attract investors. Not surprisingly, over the past year, a majority of the largest marijuana stocks by market cap have doubled or tripled in value.
Consider investing in marijuana? Better look north
Of course, the cannabis industry can be a friendly or unkind place for investors to park their cash, regardless of sales growth, depending on the country. Within the U.S., despite growing support from the public to legalize recreational weed, the federal government has refused to budge on its schedule I classification (this means weed is wholly illegal). In fact, under the Trump administration, we've witnessed the federal government tighten the noose a bit around the legal cannabis industry by rescinding the Cole memo.
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By comparison, Canada has become a veritable playground for investor profits when it comes to pot stocks. Canada legalized medicinal cannabis in 2001, and it appears to be on the verge of green-lighting the sale of recreational marijuana to adults beginning this summer. Progressives are clearly in control of Canada's parliament, and a two-year tax-sharing agreement is already in place with Canada's provinces. Assuming this bill is approved in June, Canada could generate billions in added revenue each year from weed sales.
As a result of this expected legalization, coupled with strong medical patient growth and the ability of some Canadian growers to export their dried cannabis crop to foreign countries where medical pot is legal, Canadian pot stocks have been expanding their production capacity as quickly as their wallets will allow. This past week, Canopy Growth Corp.'s (CGC -0.66%) capacity grew once more when it announced a substantial supply agreement with Vancouver-based Sunniva (SNNVF).
Canopy is getting even larger thanks to this new supply and sales agreement
Canopy Growth, the largest marijuana stock in the world by market cap, announced on Wednesday, Feb. 21, that it had signed a two-year agreement to purchase up to 90,000 kilograms of dried cannabis from Sunniva's wholly owned subsidiary, Sunniva Medical. Sunniva is in the process of developing a 700,000-square-foot grow facility in British Columbia that will supply the cannabis for its arrangement with Canopy Growth. In forging this agreement, Sunniva guarantees itself a steady source of revenue, assuming it can deliver on its growth projections, over the next two years.
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As for Canopy, it secures another high-quality source of cannabis that it can add to its growing product portfolio. Remember, Canopy already has the most recognized marijuana brand in the country, Tweed, and has been working diligently to grow its distribution channels in expectation of a recreational legalization by this coming summer. Canopy has the option of offloading supply from this agreement on provinces where it already has supply agreements, through its online sales channels, or via its vast retail network spread throughout Canada. And, as you might imagine, there are risk-sharing formulas in place to protect Canopy Growth and Sunniva.
Here's what Mark Zekulin, the president of Canopy Growth Corp., had to say following the announcement of the supply agreement:
"We welcome Sunniva to the Canopy Growth family and look forward to collaborating with their team to provide a steady and high-quality source of cannabis products for consumers. Through provincial distribution channels, brick and mortar locations, and our online Tweed Main Street e-commerce platform we are diversifying our ability to deliver a one-stop shopping experience to consumers and provincial bodies alike. With partners like Sunniva, we are well positioned to capture market share through robust supply channels."
Canopy's breadth, in a nutshell
Just how big could Canopy grow? It's really tough to say because there's no precedent for a legal weed market for adults outside of Uruguay. Some estimates from Wall Street suggest that the company could command in the neighborhood of 15% of the medical and recreational market, with recreational clearly being the quicker growing and higher demand source.
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According to the company's recently reported third-quarter operating results, it has 3.7 million square feet of growing capacity in British Columbia with greenhouses being constructed or in development. This comes on top of the seven facilities over 665,000 square feet that it already has under its belt, some of which came from its acquisition of Mettrum Health in January 2017. Of course, there's really no consensus as to when this capacity will be fully online. Thus, full-year sales estimates for fiscal 2019 have an exceptionally wide variance for Canopy Growth, more so than any other marijuana stock.
Then again, there simply isn't another grower out there that has more seamlessly combined the aspects of growing with a well-oiled distribution channel like Canopy Growth has. Its substantive investments in capacity expansion, branding, and even its brick-and-mortar presence could result in underwhelming profitability over the next couple of years. But if Canopy Growth can secure 15% or more of Canadian cannabis market share, its stock could be treated similarly to Amazon.com. In essence, it'd be rewarded for its operating cash flow and market share, rather than its immediate push for profits.
Though you might be under the impression that there's no glory to be had in buying the biggest company in an industry, there could very well be plenty of upside left for Canopy Growth if the cards fall its way.
