3 Things Investors Really Need to Know About Marijuana Stock Canopy Growth Corporation – Motley Fool

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Only 51 authorized licenses have been given to suppliers of medical marijuana in Canada. Canopy Growth Corporation (NASDAQOTH:TWMJF) holds four of them. Canopy Growth is also the largest Canadian marijuana stock, with a market cap of more than $950 million — well above rivals such as Aphria (NASDAQOTH:APHQF) and Aurora Cannabis (NASDAQOTH:ACBFF).

But is Canopy Growth a marijuana stock that investors should buy now? Here are three things you need to know first before making a decision. 

Marijuana leaf being held with marijuana plants in background

Image source: Getty Images.

1. Sales are soaring — but the stock isn’t

Business is booming for Canopy Growth. The company reported its 2017 fiscal year and fourth-quarter results on June 27. Sales for the year totaled $39.9 million — up a whopping 214% compared to the previous year.

For the fourth quarter, Canopy Growth posted revenue of $14.7 million. That’s a 191% year-over-year increase and a 50% jump from the third quarter of fiscal 2017.

Despite these soaring sales, though, Canopy Growth stock has fallen around 10% so far in 2017. Granted, that’s relatively insignificant when you consider that the share price is still up over 190% since the beginning of last year. However, investors should know why the stock isn’t growing as much as its marijuana crops and revenue are.

One reason is that Canopy Growth’s bottom-line performance doesn’t look as good. The company lost nearly $22 million in its fiscal fourth quarter compared to a loss of $5 million in the prior-year period. One reason behind this bigger loss was Canopy Growth’s acquisitions activity. However, it is also spending a lot more money than in the past on sales, marketing, and administrative functions.

In addition, the Canadian government announced in May that it plans to make significant changes to the medical cannabis program. Those changes include authorizing more providers to supply medical marijuana in the country. That means Canopy Growth, Aphria, Aurora Cannabis, and other peers could soon face more competition. 

Opportunity highway sign

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2. Opportunities are great

While Canopy Growth’s sales are growing in the Canadian medical marijuana market, that could be merely the tip of the iceberg for the company’s potential. Canopy Growth has already begun to expand into international markets, including Australia, Brazil, Chile, and Germany.

The German market is especially promising. Germany legalized medical marijuana effective March 2017. However, the country is importing all medical marijuana until it can establish a state-regulated program for internal production. With a population of more than 80 million, Germany presents a large potential market for Canopy Growth.

Then there’s the possibility of a much bigger market right at home. Canadian Prime Minister Justin Trudeau is attempting to deliver on a campaign promise to legalize the recreational use of marijuana. His goal is for this legalization to be effective in July 2018. 

Should Trudeau succeed in his efforts, it would present another great opportunity for Canopy Growth. Professional services firm Deloitte projects that the retail market for marijuana could be between $4.9 billion to $8.7 billion annually. 

Risk ahead street sign

Image source: Getty Images.

3. Risks are great, too

While the opportunities for Canopy Growth are indeed great, so are the risks that the company faces. Perhaps most important, it’s not a foregone conclusion that Canada will legalize recreational marijuana. And, even if it does, the timeline could be pushed back.

Canopy Growth could also potentially see its sales in Germany decrease significantly once the country sets up its program for native marijuana growers. However, it’s unknown how long the process will take for the German government to establish the program.

In the meantime, other Canadian marijuana growers are eyeing the German market. Aurora Cannabis acquired a leading German wholesale importer in May. Aphria has also indicated interest in selling medical marijuana in Germany.

The aforementioned proposed expansion of marijuana providers in Canada also could be problematic for Canopy Growth. There could be an even larger “green rush” of providers applying for licenses to supply marijuana if recreational use of the drug is legalized.

All of these possible issues highlight the other risk for Canopy Growth: The stock is super expensive right now. Shares trade at more than 31 times sales. That’s beyond nosebleed level. This stratospheric valuation has a lot of growth baked into the price of the stock. If there are any hiccups in that growth, Canopy Growth investors could feel the pain. 

Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.