Canada-based Canopy Growth (NASDAQ:CGC) has been eyeing the U.S. pot market for some time. In 2019, the pot producer rocked the cannabis industry when it said it agreed to a deal to acquire multistate operator Acreage Holdings. But with marijuana illegal in the U.S., the deal remains on hold pending major legal changes.
However, Canopy Growth’s CEO David Klein is optimistic that legalization will take place sooner rather than later. In a recent interview on Bloomberg, he said, “we’re pretty confident we’ll be operating in the U.S. a year from now.” It’s a pretty bold statement considering that there has been little progress on marijuana legislation at the federal level, even in just the past year. Is Klein being too optimistic? Let’s take a closer look at the state of the U.S. pot market today and whether it’s likely that Canopy Growth will be operating there within the next 12 months.
Is legalization inevitable?
There’s no doubt that marijuana reform is a lot more likely than it was even a year or two ago. President Joe Biden is in favor of reform, stating on his campaign website that “getting caught for smoking marijuana shouldn’t deny you a good-paying job and career, a loan, or ability to rent an apartment.” Vice President Kamala Harris also vowed to decriminalize marijuana during a debate last year. And a Gallup poll released last November also showed that a record 68% of Americans are now in favor of legalizing the drug.
Decriminalizing marijuana would be a big step forward for the industry, however, it would still fall short of outright legalization. Klein didn’t mention legalization when talking about operating in the U.S. and instead pointed to “some combination of SAFE Banking, a revised Cole memorandum, and a reclassification by the executive branch,” suggesting a combination of these factors could suffice.
Whether that would indeed be enough is debatable, as it’ll ultimately depend on what the end legislation looks like. A lot will also depend on what the exchanges say. In 2017, the Toronto Stock Exchange (TSX) sent a warning out to Canadian-based businesses that had cannabis operations in the U.S. It told companies, including Aphria, which had investments in both Arizona and Florida, that their shares could be delisted since they were in violation of federal laws in the U.S., and thus, the TSX’s own listing requirements.
Marijuana legalization is on the horizon for the U.S. but to suggest that it, or something resembling it, will happen within the next 12 months seems a stretch to me. The COVID-19 pandemic will keep the new president busy enough as it is for the foreseeable future. And although he’s in favor of marijuana reform, it doesn’t appear to be a priority — and it’s by no means a guarantee that anything will happen in his first year on the job.
Why investors shouldn’t get too excited
Investors need to consider the source of all this pot stock bullishness. The CEO of a Canadian-based pot stock that’s eager to enter the U.S. marijuana market has a lot to gain if pot is legalized south of the border. And if he can convince investors that there’s a strong likelihood of legalization happening, that makes the stock stronger and the company more valuable. His opinion is not unbiased and that’s why it’s important to take this prediction with a grain of salt.
It looks like marijuana reform will happen at some point in the U.S., especially with medical marijuana legal in 36 states and 15 states permitting it for recreational use. The growing acceptability of pot across the country suggests that it’s not a question of if marijuana will be legal, only a matter of when. But it could still take years before legalization happens.
Should you buy Canopy Growth stock anyway?
In just the past six months, shares of Canopy Growth have nearly doubled, soaring past even the Horizons Marijuana Life Sciences ETF, which is up more than 65% over the same period. Pot stocks got a big boost from November’s election results where four states voted to legalize recreational marijuana.
However, with an expensive valuation, Canopy Growth’s stock is vulnerable to a correction, especially if there’s a market crash this year. Trading at a multiple of 32 times its revenue, it’s significantly more expensive than the average stock on the Horizons ETF where investors are paying a price-to-sales (P/S) multiple of just three.
With many multistate cannabis operators out there already, investors have many options for investing in the U.S. pot market without the need for buying shares of Canopy Growth. And unless its share price comes crashing down to more reasonable revenue multiples, investors should pass on the Canadian pot stock for now.