Growth in the marijuana industry simply can't be slowed in recent years, which is a big reason why marijuana stocks have performed so well. According to cannabis research firm ArcView, in partnership with BDS Analytics, North American legal pot sales could grow by an estimated 28% annually through 2021. That's a big reason why most pot stocks have doubled or tripled over the trailing year, and why a few have risen by more than 1,000% over the trailing two-year period.
But among the countries leading the charge for legal cannabis, the U.S. is no longer in the lead. Even though it could easily be the most lucrative marijuana market in the world, it's Canada that's taken charge. Canada legalized medicinal cannabis back in 2001, and now stands on the doorstep of legalizing recreational weed by this coming summer. With a tax-sharing agreement in place in all but one province, legalization looks like a near certainty in our neighbor to the north.
Everything you need to know about Canopy Growth Corp.
What companies might benefit from that legalization? Chances are it would be a major positive for the largest marijuana stock in the world by market cap, the Canadian-based Canopy Growth Corp. (NASDAQOTH:TWMJF). Canopy, whose shares have risen by more than 1,100% on a trailing two-year basis, has done well by its shareholders. The important question, of course, is, will it continue to do well for investors?
If you're already a Canopy Growth shareholders, or you've considered putting your money to work in this pot juggernaut, here are 10 things you should first know.
1. It'll probably possess the highest medical and recreational market share
Chances are decent that in spite of a recent flurry of acquisitions and strategic partnerships from the likes of Aurora Cannabis and Aphria, Canopy Growth will lead Canada in medical and recreational cannabis market share.
Though the company has been tight-lipped about its annual production capacity, what we do know is that it has seven facilities operating on 665,000 square feet at the moment, as well as 3.7 million square feet in British Columbia where greenhouse facilities are under construction or in development. What's unclear is when these facilities will be complete. Upon completion, and not taking into account its own strategic supply agreements, Canopy Growth should be producing upwards of 300,000 kilograms of cannabis a year.
2. It's regularly grown by acquisition
Before growing by acquisition was popular in the marijuana industry, Canopy Growth was pioneering this growth method. In January 2017, it completed the acquisition of Mettrum Health for approximately $283 million, which significantly improved its patient reach throughout Canada and broadened the number of licensed grow facilities under its control. This merger also occurred prior to Prime Minister Justin Trudeau introducing legislation to legalize recreational weed.
3. It has a lot of cash on hand to further expand
The company is sitting on a boatload of cash. Within the company's third-quarter operating results press release, Canopy notes that it ended with $181.4 million in cash and cash equivalents, but had added another $146.9 million via a bought-deal offering following the end of its fiscal third quarter. This new funding, along a private placement by Canopy Rivers, brings its cash and cash equivalents up to approximately $335 million as of its Valentine's Day press release.
Keep in mind, the company is still looking to be aggressive with its cash. Right now, Canopy is believed to have the inside track to acquire Spanish pharmaceutical company Alcaliber. While nothing is finalized, Alcalber would provide an international distribution channel for Canopy, while also diversifying its revenue stream. (Alcaliber is the world's biggest manufacturer and distributor of morphine.)
4. Oils and extracts are playing an increasingly larger role
An under-the-radar but monstrously important fact about Canopy Growth is that cannabis oils and extracts have a growing importance to its top and bottom line. Oils and extracts are a considerably higher-priced product that, in this instance, also means juicier margins. Diversifying away from the highly commoditized dried cannabis should allow Canopy to earn more with relatively the same amount of total sales. In the third quarter, 23% of its sales were derived from oils and extracts, compared with 13% in the year-ago period.
5. Canopy has the backing of a major beer and spirits company
Next, it's important to recognize that this company has the backing of Corona beer and spirits producer Constellation Brands (NYSE:STZ). Constellation wound up purchasing a 9.9% stake in Canopy late last year, worth around $191 million at the time, though it has since appreciated considerably. Though Constellation has no intentions of entering markets with Canopy where federal governments consider cannabis to be illegal, this pairing provides the leading marijuana company with a seasoned marketing and distribution team, as well as lays the groundwork for future product partnerships.
6. Its distribution channel and branding are unmatched in the cannabis space
Speaking of distribution channels, marketing, and branding, there isn't a pot stock that can hold a candle to Canopy Growth Corp. It already possesses the most popular cannabis brand in the domestic market, Tweed, and has partnered with Constellation Brands, which has a wide variety of well-known spirit and beer brands. Canopy also offers a balanced sales approach between its online stores and brick-and-mortar dispensaries. Domestically, this company is a vertically and horizontally integrated marijuana marvel.
7. International expansion is a critical goal (not including the U.S.)
However, Canopy Growth isn't just satisfied being a leader in Canada -- it's aiming to get its foot in the door in as many international markets as is reasonable. With much of Europe now allowing the sale of medicinal marijuana, and Canada among the few countries allowed to export dried cannabis to medical pot countries, Canopy has had no shortage of markets with which to offload production. Considering the real possibility that Canada could face a huge oversupply of domestic cannabis, these international opportunities could be crucial to stabilizing margins.
Notably, the U.S. isn't on Canopy's expansion list, at least as long as cannabis remains a Schedule I substance.
8. It's among the lowest-cost producers in the industry
Getting bigger doesn't always mean lower costs, but in the case of Canopy Growth it should mean substantially lower growing costs per gram. The company's weighted average cost per gram before shipping and fulfillment fell to $0.79 in the latest quarter, which was down 39% from the prior-year period. Mind you, based on the company's Q3 production, this is the extrapolated cost for approximately 9,000 kilograms to 10,000 kilograms in annual output. As the company's operations expand, it wouldn't be surprising to see this $0.79 per gram cost fall by another 20% to 30%, in my opinion. These low growing costs should help counter any potential price weakness caused by oversupply.
9. It may be one of the last pot stocks to turn a profit
Interestingly enough, in spite of being a market share leader, Canopy Growth could be among the last cannabis stocks to turn a profit. Similar to how Amazon.com de-emphasized profitability in favor of operating cash flow and reinvesting that cash flow in order to secure its market share in the years to come, Canopy is expected to reinvest its operating cash flow into capacity expansion, partnerships, and acquisitions. Whether that'll impact its valuation remains to be seen.
10. Yes, dilution is a concern
Finally -- and you knew this was coming -- dilution remains a serious concern for practically all marijuana stocks, including Canopy Growth. Given that most pot stocks aren't generating much in the way of positive cash flow, they've primarily turned to bought-deal offerings to raise capital. These offerings often sell common stock, convertible debentures, warrants, and/or stock options, which ultimately increase the number of shares outstanding immediately, or over time. This winds up diluting existing shareholders, as well as makes it tougher for a marijuana company to generate a meaningful profit on a per-share basis.
In less than two years, Canopy's Canadian listing has seen it share count more than double from 77 million shares to 171.1 million shares. Don't expect this dilution to slow anytime soon, either.
Now that you have a solid bead on what matters, you can determine whether or not Canopy Growth is right for your portfolio.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.