Looking to Buy Canopy Growth? Here Are 5 Things You Should Know First

Two thousand percent. That's what your return would have been if you bought Canopy Growth (CGC +0.25%) shares three years ago and held on to them. So far this year, the stock is up by 61%. With this kind of sizzling performance, it's no wonder that investors have taken quite an interest in Canopy Growth.

But there's more to the story for this Canadian marijuana producer than just its previous stock gains. If you're looking to buy shares of Canopy Growth now, here are five things you should know first.

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1. It's leading in Canada's recreational marijuana market

Canada's recreational marijuana market opened for business on Oct. 17, 2018. With many expecting this market to grow to close to $5 billion or more over the next few years, winning in Canada is tremendously important for any marijuana producer in the country. The good news for Canopy Growth is that it's definitely a top winner so far.

In the quarter ending Dec. 31, 2018, Canopy Growth racked up recreational pot sales of 57.7 million Canadian dollars (a little over US$43 million). That sales figure is over two times higher than what the company with the No. 2 market share, Aurora Cannabis, reported in the same period.

2. It's a top player in international medical cannabis markets

As significant as Canada's recreational marijuana market is, the global medical cannabis opportunity is even greater. Market research company Brightfield Group projects that the medical cannabis and cannabidiol (CBD) markets in Europe alone will reach nearly $10 billion by 2023. Canopy Growth is a top player in Europe as well as in other key international medical cannabis markets.

The company has operations in more than a dozen countries spanning five continents. Canopy Growth narrowly trailed Aurora last quarter in sales to Germany, the biggest medical cannabis market outside of North America. It's also positioned well to succeed in other European countries as well as Australia and Latin America.

Check out the latest earnings call transcript for Canopy Growth.

3. It has a big partner and a big cash stockpile

Probably the biggest competitive advantage for Canopy Growth is its relationship with Constellation Brands (STZ 0.01%). The big alcoholic beverage maker, best known for its Corona and Modelo premium beers, bought a 9.9% stake in Canopy in 2017. Constellation upped its ownership interest in Canopy in 2018 to around 38% with another $4 billion investment.

With Constellation Brands, Canopy Growth now has a partner with a successful track record in establishing consumer products. The company also has a big cash stockpile (around $3.7 billion at the end of 2018) to use in expanding globally.

4. It's jumping into the U.S. hemp market

Canopy Growth can't enter the U.S. marijuana market and retain its listings on major stock exchanges as long as marijuana remains illegal at the federal level. However, thanks to the 2018 Farm Bill that was signed into law in December, the door is now open to the U.S. hemp market. And Canopy Growth has already jumped through that door.

In January, Canopy announced that it had secured a hemp license in New York state and planned to invest up to $150 million to build a large-scale hemp production and processing facility. The company plans to expand rapidly into other areas in the U.S., constructing hemp industrial parks similar to what it's building in New York. Hemp, including hemp-based CBD products, has the potential to become a multibillion-dollar industry in the U.S. over the next few years.

5. Its market cap already reflects lofty growth expectations

Canopy Growth's market cap of around $15 billion is by far the highest of any marijuana grower. It also reflects lofty growth expectations, considering that Canopy made less than $120 million in revenue over the last 12 months.

But Canopy Growth might not be as expensive as it looks at first glance. Before Constellation Brands invested in Canopy, it did some number crunching. The alcoholic beverage maker thinks that the global cannabis market could top $200 billion within the next 15 years. Constellation anticipates that Canopy could gain between 5% and 15% of that market.

If those projections are anywhere close to being right, the lofty growth expectations baked into Canopy Growth's share price might not be lofty enough.