5 Words That Could Mean Billions Of Dollars For Marijuana Stocks

Photo Credit: Getty Images

You’ve heard the old saying that a picture is worth a thousand words. But what’s a word worth? In the case of five words spoken by Canada’s public safety minister, Ralph Goodale, the answer just might be at least $1 billion each.

Goodale stated this past week that Canada is “on track and on time” for legalization of recreational marijuana in July. There had been some concerns that the country wouldn’t be able to pull off legalization on such a quick time table, but Goodale’s message could alleviate some of those concerns. And, assuming he’s right, those five words could mean billions of dollars for marijuana stocks.

Time is money

Could just five words really be worth billions of dollars? Actually, yes.

Canada’s Parliamentary Budget Officer (PBO), which is the equivalent of the U.S. Congressional Budget Office, estimated that the legal recreational cannabis market in Canada will be between $4.2 billion and $6.2 billion right out of the gate. Professional services firm Deloitte’s estimate for the Canadian recreational marijuana market was $4.9 billion to $8.7 billion. One Canadian marijuana industry analyst thinks the market will be even larger than those estimates.

If we use the midpoint of the PBO’s projected range, the recreational marijuana market in Canada will be around $5.2 billion. Now suppose that the country wasn’t, to use Ralph Goodale’s words, on track and on time with its legalization effort. Any delay would result in potentially billions of lost dollars for marijuana growers and other related businesses.

Even a six-month postponement of making recreational marijuana legal in Canada would be roughly $2.6 billion of anticipated revenue for marijuana companies in the country. Time is money. And every day of slippage in the schedule for legalization will be costly.

Ready to launch?

There’s reason to believe that Canada will make its deadline, though. Prime Minister Justin Trudeau is fully committed to making it happen. His Liberal Party has the upper hand in the Canadian legislature. Also, significant tax revenue is on the line.

But is the marijuana industry in Canada ready? They’re scrambling to be in position to meet what is anticipated to be very high demand.

Canopy Growth, the largest medical marijuana grower in Canada, has over 2.4 million square feet of indoor and greenhouse production under development. These expansion efforts include construction of a new 212,000-square-foot greenhouse and the purchase of a 450,000-square-foot greenhouse in Niagara-on-the-Lake, Ontario. In addition, Canopy is in a joint venture to develop 1.3 million square feet of greenhouse growing capacity in British Columbia, with an option for an additional 1.7 million-square-foot greenhouse in the province.

Aurora Cannabis has also been busy building new production facilities. The company is constructing an 800,000-square-foot facility in Alberta, which should be completed by mid-2018. Aurora bought a 48,000 square feet in Quebec with its purchase of H2 Biopharma.

In addition, Aurora’s hostile takeover attempt of CanniMed Therapeutics finally ended amicably after months of drama. This acquisition will give Aurora an extra 19,000 kilograms per year in funded capacity.

Other marijuana growers are also adding capacity to be ready for an expected launch of recreational marijuana in Canada this summer. While the industry is likely to be prepared for the most part, it’s quite possible that supply won’t be sufficient to meet demand — at least for a while.

Valuation, shmaluation?

While there’s great excitement about what could be in store with the Canadian marijuana market, much of the anticipation of growth is already baked into the share prices of marijuana growers. There isn’t a single Canadian marijuana stock that doesn’t look extremely expensive.

Canopy Growth, for example, has a market cap of more than $4 billion with sales of less than $50 million over the past 12 months. The company reports its latest quarter’s results next week, which should make that revenue figure look better. Still, though, Canopy’s valuation based on sales would make famed value investor Benjamin Graham spin in his grave.

Aurora Cannabis has a market cap not far behind Canopy Growth. However, the marijuana grower has even lower sales over the past 12 months than Canopy did. Aurora stock currently trades at a stunning 215 times trailing-12-month sales.

But if projections of a Canadian marijuana market worth $5 billion or more annually are on target, it changes how to look at the valuations of Canadian marijuana stocks. What if Canopy Growth and Aurora, for example, can each claim around 20% of the recreational marijuana market? That would give each company annual sales of at least $1 billion. A market cap in the $4 billion ballpark doesn’t seem scary at all in that scenario.

So are Canopy Growth, Aurora Cannabis, and other leading Canadian marijuana stocks great growth stocks to buy right now? It all depends on just how many billions of dollars those five words Ralph Goodale spoke are really worth.