For the US cannabis industry, November 2020 was the sweetest month. Not only was cannabis made legal in five more US states, but the Democrats won the US presidential elections. President-elect Joe Biden and his deputy Kamala Harris have both indicated their support for the reform of cannabis laws at the federal level.
In December, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which aims to take cannabis off the list of controlled substances, was passed in the House of Representatives. And, separately, the UN took cannabis off its schedule of dangerous drugs.
For Canopy Growth Corporation (TSX.WEED, LSE.0UO9), the biggest Canadian cannabis producer, access to the US market, currently worth some $20bn in sales, is crucial. The company faced such financial difficulties that last January key investor Constellation Brands (STZ) forced the appointment of a new CEO, David Klein. He arrived with a strategic review in his pocket that reversed its global expansion strategy and scaled back operations to stem the company’s losses and improve its margins.
Canopy Growth’s focus on evolving US markets is welcome
Canopy Growth’s renewed focus on the domestic and US markets is welcome, not least because the US government is the one most likely to legalise cannabis in the short term. But Canopy Growth has other concerns too. Rivals Aphria (APHA) and Tilray (TLRY) last December announced a merger, a reminder that competition in the sector is set to grow. So, is now the time to buy Canopy Growth?
The Canopy Growth share price finished the year at C$31.32, after jumping more than 50% in November on Biden’s election win. The price reflects a 21.3% increase over the year and a 74.4% increase over three years. The decision by the Canadian government to legalise cannabis in November 2018 galvanised the cannabis industry and caused Canopy Growth’s share price to surge, which could also happen if, or when, Biden signs off the MORE Act.
If Canopy Growth’s share price looks cheap, that’s because the company is unprofitable, with losses mounting over the past five years at a rate of 73.6% per year. The balance sheet features liabilities of C$319.7m this year and C$1.26bn in the future, set against more than C$2bn in cash and receivables. Looking ahead, however, the picture is more positive. With a forecasted annual earnings growth of 44% and revenues growth of 34.6%, the company should return to profitability in the next three years.
Cannabis sector outlook is positive
The outlook for the cannabis sector looks positive. The full potential of cannabis has yet to be tapped, and pressure is building on governments to lift laws against its use. As many as 16 research groups are investigating whether cannabis can be used to treat Covid symptoms. For cash-strapped governments, a thriving cannabis sector would represent a much-needed source of new jobs and tax revenue. The US state of Colorado reported income of $300m from cannabis taxes for 2019, while studies suggest a legal cannabis industry in the UK could be worth £3bn by 2024.
Growing bi-partisan support for the legalisation of cannabis in the US could see a surge of reforms in US state legislatures this year, interestingly less than a decade after Colorado became the first US state to legalise cannabis in 2012. As Klein said after the US election result, it is only a matter of time before Canopy Growth can launch its operations in the huge US market. The direction of travel is clear, just as it is for shares in Canopy Growth when, rather than if, cannabis is fully legalised in the US.