Canopy Growth Corp (WEED)

[Wo]

.Canopy Growth: An International Perspective
May. 16, 2017 8:19 AM • TWMJF
https://seekingalpha.com/article/4073650-canopy-growth-international-perspective

Analysis

Summary

There has been significant growth in the international market that will result in the international market being 11 times larger than the Canadian market.
Canopy has set out strategic objective to set up facilities in key countries such as Germany.
Strict Canadian regulations will provide a competitive advantage when going global.
There has been a lot of talk surrounding the valuation of Canopy Growth (OTCPK:TWMJF) and the timing of recreational marijuana legalization in Canada. While both of these are factors that will control the stock price, we would like to focus on the global opportunities that Canopy will likely capitalize on. Currently, the global cannabis market is expected to grow to approximately $72 billion in the next 8 years. Assuming the estimations are correct, this would mean that the global cannabis market will be 11 times larger than the Canadian market. With the sheer magnitude of the global market, we expect to see emerging global leaders in the marijuana industry to rise up in the next decade. Currently, we believe that Canopy Growth is a prime candidate to become a global leader in this space.

Thesis 1: Established International Foothold
There have been significant developments in the international medical marijuana industry in the last 3 years that are signifying future growth. While much of the discussion surrounding marijuana has been focused on the U.S and Canada legalizing medical and in some cases recreational marijuana, countries such as Germany and Australia have been favorably changing their policies with minimal attention. During the astronomical growth many Canadian cannabis companies have gone through, very few of them turned to focus on the international market. This is reflected in the number of global producers, as there are currently only four Canadian producers that export internationally. These are Tilray, Canopy Growth, Cronos Group (OTC:PRMCF), and Aphria Inc. (OTCQB:APHQF). Within this select group of companies, Canopy has the second largest foothold, distributing to MedCann GmbH Pharma and Nutraceuticals in Germany, Bedrocan Brazil and Entourage Phytolab S.A in Brazil, and AusCann Group Holdings Ltd. Department of Agriculture in Australia.
(Source: PI Financial)
As can be seen from the chart above, Canopy Growth has excellent market position to become a major player on a global scale. We are additionally encouraged by the legalization trends that we have seen over the last four years. There have been changes that occurred in regard to cannabis law, with over 12 countries recognizing cannabis as a medicine in the past 3 years. Many of these countries are big markets such as Poland, Germany, and Australia. This leads to a total of 29 countries that have officially recognized cannabis as a medicine, which we believe provides significant growth opportunities for Canopy. With its established distribution networks and operations we believe Canopy will be able to capture market share from smaller local producers.

Thesis 2: Strategic Plans to Establish Local Distribution Centers
Out of all the countries that Canadian LPs are currently exporting to, many analysts believe that Germany will become one of the biggest markets in terms of revenue. When Canopy originally expanded into Germany, it was selling its tweed product through a third-party distributor named MedCann. Since then, management has changed their strategy and have announced that they will put an emphasis on opening production facilities internationally. It has bought MedCann in November of 2016 and has operated it since. In Germany, the government has put out an official process for foreign companies to acquire a licence that will allow them to distribute cannabis in Germany. We are encouraged by this strategic shift as the company is going away from the more costly exporting model and is planning on distributing their product from their German facility. We would also like to point out that Germany is centrally located in Europe, allowing this facility to become a large exporter to major countries in Europe.

Thesis 3: Canadian Cannabis Policies Becoming the World Standard
The Canadian government has been previously criticized for having too many policies and regulations that limit free-market growth in the economy. While this may be true, in the case of the cannabis industry, these regulations have resulted in Canadian companies being much more competitive on the global scale. Because Canopy has to adhere to very stringent health and safety policies, it will now have a competitive advantage over international competitors who will have to adjust their processes the meet the new regulations. Currently, there are multiple countries that are developing their medical marijuana policies and are using the successful Canadian roll-out as a blueprint for themselves. Additionally, Canada is widely respected around the world when it comes to drug control as it has been a part of many U.N drug control conventions. As Canada becomes the only G7 country to legalize recreational marijuana, we believe that many other G7 nations will receive considerable pressure from their citizens to reform their policies. We view all this as a positive as Canopy Growth will be in an operational advantage as compared to smaller international players and will have a first mover advantage once marijuana is legalized across the world.

Takeaway
While many investors are heavily focused on the Canadian cannabis market, there has been significant growth internationally. Currently, Canopy is the best positioned company to become an international leader in this space due to an already strong foothold, a localization-based international strategy, and the company's adherence to strict Canadian regulations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.