Is Canopy Growth Corp. Overvalued?



    “Buy when investors are fearful and sell when they are greedy”

    Unfortunately for Canopy Growth (TSX: WEED), there doesn’t appear to be any fear. There is championship boxing-level unapologetic optimism and confidence. Investors and shareholders continue to buy a stock that is essentially still a speculative investment.

    The stock has dropped from highs of $13 but its pricing remains hinged significantly on the potential growth in the company, while ignoring risks inherent in both Canopy and the industry at large.

    All of this being said, Canopy has demonstrated their commitment to innovate in an industry that otherwise remains amicable with “simply” producing and selling weed. Canopy has invested significantly into product development, creative marketing initiatives, and a unique CraftGrow line of products, aligning themselves strategically with leading Licensed Producers across the country. Below are some concerns with the stock:

     

    Valuation

    In February of 2017, Canopy was trading at over 60 times earnings, with no actual earning unfortunately. Fast forward to June, the stock was trading at over 40 times revenue, and still without earnings. Today, the stock is trading at over 36 times revenue, and as per their latest filings on SEDAR, the company had a net loss of $0.14 per share, so still no earnings.

    That being said, the latest quarter saw a 50% sequential increase in revenue, in addition to a 191% increase in year-over-year revenue. Now, of course, the entire industry, and Canopy as well – is still in its infancy. We are very early in the Cannabis industry, despite legalization looming 9 months away. All this to say – the risks remain high, no pun intended.

    Once these companies are based on actual fundamentals, these shares can go down just as fast as they skyrocketed up.

     

    Competition

    As investors and shareholders already understand – the Cannabis industry is filled with thirsty competition. As we move closer to legalization, more and more producers will emerge and become licensed. We’re sitting around 60 Licensed Producers at the moment, with a total of 80 expected by the end of 2017. All of this will alter the dynamics of the industry and inch us closer to a commoditized market. Aurora Cannabis (TSX: ACB) and Aphria Inc (TSX: APH) are examples of thorough competition in the space.

    As investors we can only speculate where this business model will settle and what kinds of margins can be expected, what kinds of profit margins are available, and what shareholders can anticipate in terms of returns.

    With the limitations surrounding advertising cannabis in Canada, we may even see under-the-radar LPs who come through and disrupt the market based on creative and effective marketing outreach.

    Unstable Regulatory Environment

    Challenges still remain in regards to the legislation, as to be expected with a product emerging from a historically-illicit market. On top of this, rules remain to be written surrounding the distribution and marketing of cannabis in Canada.

    Pioneers don’t always survive as emerging industries evolve.

    Given this, another effective strategy with cannabis stocks is to buy in baskets to diversify the risk of one of them going south, which happens in these industries all the time.

    As we can see, its not easy to value a company when so many unknowns remain, and so much uncertainty lingers within the emerging commercialization of the industry. While the stock could be much higher (puns in this industry are endless) years from now, we are still speculating.

    Its still wise to be patient with these shares and to sell when the market is buying. All things considered, we’ve personally still have made great gains on Canopy stock, and hope it continues to plough ahead. Alas, sometimes boring is better.