Canopy Growth (CGC) is attempting a breakout to new highs as the Canadian cannabis company makes a big attempt to push into the U.S. cannabis market. The surprise move was the right to purchase Acreage Holdings (ACRGF) in the future, but the company has aggressively moved into the hemp market as well. While the purchase has high hopes for the U.S. government to approve cannabis at the federal level, the later move already has government approval via the 2018 Farm Bill.
Hemp Industrial Park
The stock rose over 4% on Monday to recent highs above $52 presumably due to the company securing a facility in New York to commence construction of a plant to support extraction and manufacturing of hemp-derived cannabinoids or CBD. The old facility has 308,000 square feet and 48 acres providing a large facility to kickoff the entry of Canopy Growth into the U.S. market.
Canopy Growth obtained a hemp license from New York back in January and had previously disclosed plans to spend up to $150 million on hemp projects in the state. This NY hemp project appears to have a mid-2020 production ramp-up target.
The CBD market is already in full force so some questions should pop up as to whether Canopy Growth is actually slightly late to the market. The U.S. hemp market is forecast to reach 2020 sales of $2.1 billion with the majority of sales coming from CBD products.
Not The Biggest U.S. Move
A few weeks back, Canopy Growth made a deal that involves the right to purchase Acreage Holdings once cannabis is federally legal in the U.S. The company is paying $3.4 billion to buy Acreage with an upfront cost of $300 million for this future right.
The deal involves a $2.55 per share upfront payment to investors for waiting plus an agreement to receive 0.5818 shares of Canopy Growth once the deal closes. At the current stock price of $52, Acreage shareholders have a right to a Canopy Growth stock worth $30.25 plus the $2.55 payment. The stock only trades right above $22 on the deal so the market isn’t too confident that federal approval will allow the deal to close any time soon.
The problem for shareholders is that the outcome is unknown. The U.S. is likely to approve cannabis in the future, but no guarantee exists. Not to mention, where Canopy Growth trades at that point is another high risk as the company has aggressive global expansion plans.
The odd part is that the one-two punch into the U.S. cannabis market has investors excited about the potential for Canopy Growth while not so much convinced in the Acreage deal closing in the near term. In fact, the market seems to suggest the deal closing might not occur in time for investors to cash in on this rally in Canopy Growth.
The key investor takeaway is that Canopy Growth has broken up past recent resistance in the $45 to $50 range. The stock hit an all-time high at nearly $60 last year following the Constellation Brands deal.
Entering the U.S. market opens up the biggest cannabis market in the world with estimates at $80 billion by 2030. The problem is that Canopy Growth now has a market valuation of nearly $18 billion while the CEO only expects revenues to top C$1 billion or ~$700 million in the next 12 months. For this reason, the Acreage investors appear smart to consider this rally in Canopy Growth as an unsustainable part of the hype of entering the U.S. market.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no positions in Canopy Growth stock.
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