Is the Biggest Marijuana Stock Also the Best?


In some cases, bigger really is better.

Investors may wonder if this concept applies to the biggest marijuana stock by market cap, Canopy Growth Corporation (NASDAQOTH:TWMJF), whose cap is valued around $5.1 billion. Even the second largest marijuana stock, Aurora Cannabis (NASDAQOTH:ACBFF), is well behind with a market cap near $4.3 billion. 

However, Canopy Growth’s most attractive valuation for investors is, perhaps surprisingly, not its large market cap.

A single key metric makes this marijuana stock stand apart from the remaining four of Canada’s largest marijuana growers: Aurora, Aphria (NASDAQOTH:APHQF), Cronos Group (NASDAQ:CRON), and MedReleaf (NASDAQOTH:MEDFF).

For investors looking for weed stocks to invest in today, this is how the metric works.

When assessing the valuation of a marijuana stock, traditional metrics may not be helpful; instead, one unique metric might provide the most accuracy.  

The fact that several marijuana growers do not yet have positive earnings means that determining the valuation becomes more difficult. In these cases, the common metrics for determining valuation, such as price-to-earnings multiple, no longer apply.

A metrics based on revenue, such as price-to-sales, would be a simpler choice, except for one problem. Many cannabis growers’ sales are growing faster than historical price-to-sales multiples can offer meaningful interpretation. Not to mention, predicting a company’s future sales is no easy task.

The old-school method, price-to-book ratio, could be of use here. But even this method comes with a drawback: a calculation of book value requires deducting liabilities from assets. And most marijuana growers experience significant fluctuation in asset valuations.

Taking these issues into consideration, then, the better valuation metric for use in the marijuana industry might be market cap/annual production capacity. This may be the one metric that gives investors insight into how much performance they can expect for the cost of their investment in each marijuana stock.

While identifying market cap is easy enough, pinning down the production capacity for marijuana stocks is more complex and requires forward thinking. 

Utilizing a market cap/production capacity metric does not come without its challenges, however. Finding market caps for individual marijuana stocks is clear and simple; what isn’t so clear-cut is determining each company’s annual production capacity.

Several factors contribute to this challenge. One, Canada’s marijuana industry has been in the throes of rapid change. Second, every one of the country’s big players have been feverishly working to expand internal capacity; and for some, external capacity. A recent example of this would be Aurora’s acquisition of CanniMed Therapeutics.

Bottom line: a marijuana grower’s production capacity is going to look different a year or so from now than what has been projected today. That’s not to say that the market cap/annual production capacity metric won’t be useful; it may just require factoring in the expansions that marijuana growers have planned a few years out. And with this, the realization that future partnerships and acquisitions may muddle the metric.

Figuring out the annual production capacity for marijuana stock Canopy Growth comes with its own hurdle, though not insurmountable. 

Canopy Growth is the one marijuana grower that has not provided guidance projections for its current or future production capacity, in terms of annual kilograms. What the company has reported is being on track in its expansion of domestic growing space – a figure of more than 5.6 million square feet.

The way around this hurdle of determining annual production capacity is to use an estimate of how much marijuana a grower can yield per square foot each year.

A study conducted by Cannabis Business Times in 2016 determined an average per square foot yield to be 39.5 grams. Assuming growers will have four harvests each year, this figure translates to an annual production capacity of roughly 0.16 kilograms per square foot.

According to this determination, the projected annual yield for Canopy Growth could be around 896,000 kilograms. This figure could turn out to be overly confident. If the same measure were applied to Cronos Group’s expansion, for example – the completed indoor facility providing 286,000 square feet for growing and 40,000 kilograms of estimated annual capacity – the yield would be near 0.14 kilograms per square foot. If this same yield applied to Canopy, the adjusted annual production capacity would be a projected 784,000 kilograms.

Using this metric of market cap/production capacity, let’s see how the “big five” among marijuana stocks in Canada stack up, keeping in mind the fluidity of projected annual production capacity. 

Company Market Cap Projected Annual Production Capacity (kg/year) Market Cap/Annual Production Capacity
Canopy Growth $5.1 billion 784,000 ~$6,450
Aphria $1.8 billion 230,000 ~$7,770
MedReleaf $1.4 billion 140,000 ~$9,730
Aurora Cannabis $4.3 billion 283,000 ~$15,200
Cronos Group $1.2 billion 71,000 ~$16,700


As one can see, Canopy Growth is valued as the most attractive among the big five, based on the metric of market cap/annual production capacity. Generally speaking, the higher a company’s market cap and annual production capacity, the lower its valuation multiples.

The one exception to this was Aurora Cannabis. Not surprisingly, Aurora’s marijuana stocks have displayed the best performance among the group over the past year, its value nearly quadrupling.

The one potential flaw associated with the market cap/annual production capacity metric is the measure’s assumption that higher sales and earnings potential are correlated with higher production capacity.

This assumption may prove true, but only in cases where supply is lower than demand. The 2018 estimate for Canada’s total marijuana demand is around 795,000, according to Mackie Research Capital. Now, consider a hypothetical scenario where Canada is the only cannabis market for each of these companies.

With Canopy Growth’s projected annual yield of 896,000, according to our metric, the company alone could supply all of Canada should the country’s demand hold steady. Hypothetically speaking, then, the magnitude of Canopy Growth’s projected capacity could be a liability for sales and earnings, not an asset.

The reality is that the marijuana market is global, not limited to Canada, and marijuana growers are not yet able to grow the amounts of marijuana projected for the future. So, for the time being, the market cap/annual production capacity measure seems reasonable for comparing marijuana stock valuations. According to this measure, Canopy Growth is, indeed, the biggest stock and comes with the biggest value.


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