Wednesday was a good day for marijuana stock Canopy Growth (NYSE: CGC) as news of newly initiated coverage from Piper Jaffray sent shares surging 13% – the stock’s best day since October.
Piper Jaffray joins a short but growing list of brokerages watching the cannabis sector, and analyst Michael Lavery said that while they “still have much to learn in the sector,” they believe there’s attractive growth ahead for the industry, according to a note to clients.
“We do believe the long-term growth opportunities are significant – both from transitioning illicit trade to legal sales, medical sales, and from transitioning sales in health & wellness categories to CBD-infused products,” Lavery wrote in the note to clients. “While timing of further changes is difficult to predict, the pace of further legalization appears to be accelerating.”
Lavery set an overweight rating on Canopy Growth with a price target of $40.
The Piper Jaffray analyst added that he believes there is currently a $15 billion to $50 billion total addressable market between both Canada’s medical and recreational market, CBD-infused products in key U.S. categories, and medical usage in the European Union, and said that the long-term global cannabis market will be closer to $250 billion to $500 billion.
He also noted that more than 25 countries have already legalized marijuana use in some form, and said that he believes federal legalization in the U.S. could potentially come in the next five years. He also expects capital flow into the sector will continue for the foreseeable future.
“We expect legal recreational marijuana to source from illicit trade and could attract new users to the category, while THC-infused drinks could source share from alcoholic beverages,” Lavery wrote. “Medical cannabis can replace a variety of products (e.g. pain relief, sleep aid, opioid replacement). CBD-infused products (with non-psychoactive properties) could gain share from food, beverage, and personal care categories.”
Lavery is one of a small handful of analysts covering the budding industry. Cowen analyst Vivien Azer was one of the first from a major firm to cover the sector, and also issued her 2019 cannabis outlook this week, raising her projection for U.S. sales to $80 billion by 2030.
Azer is also positive on Canopy Growth and expects a “material increase” in revenue at the company in 2019 as supply issues are addressed. She sees Canopy’s sales jumping from C$239 million in FY19 to C$778 billion in FY20, representing a 225% surge in sales.
“We remain confident in Canopy’s ability to generate such vibrant sequential growth based on the company’s seemingly leading share in the market,” Azer wrote.
Lavery agrees writing, “While it is difficult to predict how Canopy may be positioned long-term, we believe its large size currently (relative to competitors) is likely to help drive near-term momentum that can provide resources to help fuel long-term growth.”
“Canopy believes it can formulate both a THC-infused beverage that can substitute for alcoholic drinks and a CBD-infused sports recovery beverage that will ultimately compete with Gatorade,” Lavery added. “Canopy’s partnership with Constellation Brands (NYSE: STZ) gives it a competitive advantage in beverages, and it has already begun construction on a new bottling facility at its headquarters, which it designed with Constellation’s expertise.”