Canopy Growth (NYSE:CGC) is Canada's largest marijuana stock by revenue, but its future is going to be far less determined by legal marijuana sales in Canada than it will be by sales in the United States. This leading purveyor of pot has already announced plans to create a hemp industrial park in New York state to establish a footprint in the world's biggest marijuana market, and on Thursday, it announced it's acquiring AgriNextUSA, a U.S. hemp-focused real estate company. Here's what Canopy Growth is saying about its plans to profit from potential U.S. legalization.
Marijuana remains a schedule 1 controlled substance in the U.S., so it's still illegal at the federal level. However, 33 states have passed pot laws establishing marijuana marketplaces in some form, including 10 states that have created recreational, adult-use markets.
The momentum for widespread legalization in the U.S. is accelerating. According to Gallup, 2 in every 3 Americans support ending federal marijuana prohibition of its recreational use, including 75% of Democrats and 53% of Republicans. The improving attitude among voters toward marijuana is likely to result in more states creating recreational-use markets, including in New Jersey. It's also causing legalization to become a cornerstone policy among U.S. presidential candidates.
If Congress eventually legalizes marijuana nationally, it would be a boon for publicly traded cannabis companies, including Canopy Growth. Until recently, Canopy Growth and its peers have been prevented from targeting the U.S. because of major stock exchange listing requirements that prevent stocks from engaging in business activities where federal law prohibits it. In December, the U.S. Farm Bill removed hemp, a nonpsychoactive form of cannabis sativa, from the controlled substance list, creating a pathway for individual states to set up regulated hemp markets that Canada's cannabis companies can participate in.
Check out the latest earnings call transcript for Canopy Growth.
Eyes on the big prize
The global marijuana market is worth an estimated $150 billion per year, according to the United Nations, and the U.S. accounts for a whopping $50 billion of that spending.
Most of the American market is conducted in the shadows, however -- billions of dollars per year in marijuana sales have been shifting to legal, regulated markets since Colorado became the first state in the U.S. to open an adult-use marketplace in 2014. Today, legal marijuana sales total about $8.4 billion annually, according to GreenWave Advisors' Matt Karnes, including $4.4 billion in recreational-use sales.
The change in regulating hemp doesn't mean Canopy Growth will be able to sell marijuana in the U.S. yet, but it does give the company the opportunity to establish infrastructure to develop and market hemp-based products, and that infrastructure could eventually be leveraged for marijuana if marijuana also gets a federal nod of approval.
Recognizing the opportunity associated with hemp, Canopy Growth announced in January it's received a license from New York state to create a hemp industrial park there. Canopy Growth expects to spend between $100 million to $150 million at a soon-to-be-announced location that will eventually allow it to process hemp and develop hemp-based products, including products containing cannabidiol, or CBD, a chemical associated with health benefits that's naturally occurring in hemp and marijuana. CBD products are widely available in the U.S., with all but three of the 50 states allowing its use as medicine.
The U.S. CBD market is valued at roughly $600 million, and it could grow into a billion-dollar-plus-sized market in the future if regulators cooperate and mass-market retailers begin selling the products. Today, CBD products are usually only available at smaller natural foods stores or head shops or via prescriptions through medical marijuana dispensaries.
The opportunity to use hemp as a gateway ahead of potential marijuana legalization nationwide has Canopy Growth CEO Bruce Linton excited. In announcing the AgriNextUSA acquisition, Linton said, "The United States is the next stop on Canopy Growth's desired path to becoming a leading, revenue-generating company focused on all aspects of cannabinoids and their potential."
AgriNextUSA's CEO is Geoff Whaling, a hemp advocacy pioneer who is chairman of the National Hemp Association. Its focus is on creating hemp-based parks like the one Canopy Growth is planning in New York. Whaling and AgriNextUSA will "accelerate Canopy Growth [CGC]'s entry into key American jurisdictions as regulations surrounding the full use of hemp as a crop begin to be implemented," according to the company.
The future hemp industrial parks they plan on building will allow hemp to be "fast-tracked through a production cycle that would result in commercial applications for all parts of the plant, from root to tip," providing farmers with a one-stop shop that can serve as a "single, regional destination for their hemp crops" that "connects them with the researchers, entrepreneurs and innovators whose ideas will turn their crops into new products and industries."
Canopy Growth thinks the hemp market and hemp-derived products could disrupt several industries, including cosmetics, textiles, food, and health. If so, then Canopy Growth may become increasingly dependent on the U.S. for revenue growth in the future.