Developing Intellectual Property, Innovative New Products, and Strategic Acquisition to Drive Consumer Demand: Canopy Growth Corporation (TSX: WEED), formerly known as Tweed Marijuana Inc., is a world-leading cannabis company, which produce, distribute and sell a diverse range of cannabis and hemp-based products for both recreational and medical purposes under a portfolio of distinct brands across Canada. The company has its operations in more than a dozen countries across 5 continents. Its medical division is working through Spectrum Therapeutics. Canopy Growth operates retail stores across Canada under its Tokyo Smoke banners and award-winning Tweed.

Major Highlights and Growth Strategy:

• The group is focusing on new recreational products, strengthening the brand portfolio, and increasing access to the suite of medical cannabis products to position itself as the dominant, international leader in recreational and medical cannabis and hemp-based products, and to establish long-term competitive advantages. 

• The company is focusing on expanding its geographical footprints and making investments to expand in the United States and other new geographies while building-out the branded Tweed and Tokyo Smoke retail store network across permissible zones of Canada. Management intends to establish direct connections with the customers to build brand awareness and recognition. 

• Through Spectrum Therapeutics, the company is also targeting several healthcare practitioners and medical customers across several countries in Latin America, Asia-Pacific and Africa with the intention to introducing medically validated cannabinoid products and advancing through education and support programs.

• The company is focusing on expansion of its cannabis cultivation, finished goods manufacturing facility and sales operations by be building, acquiring, or entering into agreements with third parties. Recently, the business acquired BioSteel Sports Nutrition Inc. (BioSteel), and the management believes that the business will expand its portfolio via product innovation like sports nutrition, hydration beverages, beauty & wellness, sleep products etc.

Q3FY20 Financial Highlights (for the period ended 31st December 2019)

Q3FY20 Income statement Highlights (Source: Company Reports)

For the period ended 31^st December 2019, WEED reported net revenue of CAD 123.76 million, as compared to CAD 83.05 million in the previous corresponding quarter. The increase was due to higher revenue from Canadian recreational business-to-business channel and improved demand from newly added retail stores across Canada. In Q3FY20, the business incurred research and development of CAD 20.80 million, as compared to CAD 5.26 million in Q3 FY19. Sales and marketing expense increased to CAD 62.10 million, from CAD 48.32 million in Q3FY19. The business reported loss from operation of CAD 171.52 million, as compared to a loss of CAD 157.24 million in the previous corresponding quarter. 

Valuation Methodology: EV/Sales - Based Relative Valuation 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock of WEED is quoting at CAD 21.34, with a market capitalization of CAD 7.46 Billion. The stock is trading near the lower band of its 52-weeks trading range of CAD 12.96 and CAD 70.98. The stock price corrected by ~19.2% and ~18.8% in last one month and three months respectively but outperformed the benchmark index ~3.0% and ~4.4% during the same period. During the last five trading sessions, the stock bounced back and generated a positive return of ~35%.  The group is focusing on product innovation and recently launched cannabis infused beverages in the Canadian market. While it is too early to be precise on the impact of China coronavirus (COVID-19) on the businesses or wider economic conditions, but currently it has temporarily closed all corporate-owned Tokyo Smoke and Tweed retail locations across Canada for only safety purpose. The business intends to strengthen its European distribution and drive profitability from the zone while wants to mark its presence across new segments and geographies. With several development strategies of brand awareness campaigns, formulation of intellectual properties and product innovation, we believe the business is likely to capture new customer base in the coming years. All the recent acquisitions were in line with the strategy to expand into higher growth and higher-margin areas, complementary to the current service offering. The stock is currently trading at an EV/Sales multiple of ~8.4x.  We believe this multiple to expand going forward on account of above-mentioned facts. Based on our valuation methods we arrived at a target price with a double-digit upside (in percentage terms). Considering, the facts mentioned above, current financials, brand building initiatives and enhancing its market presence, we recommend a “Buy” rating on the stock at the closing market price of CAD 21.34 as on 26^th March 2020.

WEED Daily Technical Chart (Source: Thomson Reuters)

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