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Is Canopy Growth the Google of Weed?

By Keith Speights – Nov 20, 2018 at 6:01AM

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For investors searching for the marijuana stock most likely to survive and thrive, Canopy Growth ranks at the top of the list.

When CEOs compare a company to Google, it's usually viewed as a positive for the company. Of course, such comparisons typically actually reference Alphabet (GOOG 1.56%) (GOOGL 1.90%), the parent company of Google, which was known as Google prior to 2015. And the comparisons are intended as compliments. After all, Alphabet is one of the world's largest, most successful, and most innovative companies.

Last week, Canopy Growth Corp. (CGC 6.16%) founder and co-CEO Bruce Linton compared his own company with Google. But Canopy Growth's market cap and sales are only a sliver of Alphabet's. Was Linton's comparison arrogant? Not really. Here's why Canopy Growth just might be the Google of weed.  

Marijuana on top of a pile of $100 bills.

Image source: Getty Images.

About that Google comparison

First, we need to understand the context for what Bruce Linton said. He acknowledged on Yahoo! Finance's Midday Movers show on Nov. 14, 2018, that marijuana stocks were in a bubble. He added:

I don't know somebody who's not talking about it. And I don't know somebody who isn't putting out a press release that says they're in the business. And when they put the press release out, their company is worth half a billion dollars.

Linton said that while there is a bubble in place for marijuana stocks, there are still some "very good companies inside the bubble." It's not surprising that he views Canopy Growth as the best of those companies, with its experience, its global operations, and its major investment from large alcoholic beverage maker Constellation Brands (STZ 0.13%)

So how did Google come up during the conversation? Linton alluded to the dot-com bubble of the late 1990s and early 2000s. He said that the best marijuana companies today -- with Canopy at the top of the list, in his view -- are "not dissimilar to how probably Google was perceived in that bubble." 

Why Bruce Linton was right

Bruce Linton wasn't being arrogant. Actually, nearly everything he said was correct.

A bubble occurs when prices of an asset are driven well beyond any reasonable reflection of what the asset is actually worth. There are two schools of thought about whether marijuana stocks are in a bubble. One view is that marijuana stocks are absolutely in a bubble, with investors focusing on the hype and prospects of deals rather than profits. The other view is that marijuana stocks might not be in a bubble, factoring in their long-term growth prospects.

Bruce Linton seems to agree with both takes. Marijuana stocks are in a bubble, as evidenced by the crazy spikes in valuation given to stocks that tie themselves to the cannabis industry. We've seen plenty of examples of this happening in recent months. However, even within this general bubble, there are some marijuana stocks that are strong and have excellent long-term growth prospects.

Linton's comparison to the dot-com bubble was a good one. There are plenty of great companies that many investors would love to have been able to buy even at their peak prices during the dot-com bubble. Why? Although the stocks fell after the bubble burst, they still performed very well over the next 15 or so years.

Even though stock prices were artificially inflated during the dot-com craze, the long-term growth prospects for many of the companies were still legitimate, as demand for technology rose. We'll likely see the same phenomenon with the cannabis industry as more countries legalize medical and recreational marijuana in the coming years.

Probably the only drawback to Linton's comparison with Google was that the company didn't go public until 2004, well after the dot-com bubble burst. However, it's fair to say that Google was well regarded prior to its initial public offering (IPO), with many investors recognizing its growth potential even before the stock was available for trading.

The Google of weed

But is Canopy Growth the most likely candidate to become the "Google of weed"? Probably so.

Canopy certainly has ample production capacity on the way to meet rising demand for cannabis products. It also has the operational presence in Canada, Germany, and other international markets that should fuel growth over the next few years.

Most important, though, Canopy Growth has a close relationship with Constellation Brands. It's hard to overstate the importance of this deal. For one thing, it gave Canopy billions of dollars in cash to expand globally -- cash that its rivals don't have. It also gives Canopy a partner with expertise and success in selling alcoholic beverages across the world. The dynamics of the recreational marijuana market are relatively similar to those of alcoholic beverages.

It's possible that another major deal with another big company outside the cannabis industry could shake things up and give one of Canopy's rivals a leg up. For now, though, if there's any marijuana company in position to survive and thrive after the current marijuana stock bubble bursts, it's Canopy Growth.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

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