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Morningstar | Initiating on Fast-Growing Cannabis Industry: We See Canopy Growth as Undervalued

We are initiating coverage of cannabis, an industry we forecast to grow by 9 times through 2030 amid widening legalization and increased participation for the Canadian, international, and U.S. markets.

For Canada, despite recent recreational legalization, cannabis has penetrated just 12% of our estimated market, setting the stage for a 20% CAGR through 2030.

For the international market, we forecast market potential of nearly $43 billion and 23% CAGR through 2030 as more and more countries recognize the benefits of medical cannabis. However, increasing competition from other countries could limit the opportunity for Canadian producers to $20 billion.

For the U.S., recreational and medicinal cannabis has penetrated just 8% and 21% of their estimated markets, leading to 25% CAGR and 15% CAGR through 2030, respectively. We expect six more states to legalize recreational cannabis and three states to expand commercial distribution. Furthermore, we expect the federal government will recognize states’ rights to decide legality.

We are initiating coverage on Canopy Growth, which grows and sells cannabis in Canada and to a lesser extent, global markets. Our fair value estimates are $54 and CAD 71 per share. Our valuation is based on a 10-year explicit forecast that assumes a 30% volume CAGR, a 4% price CAGR, and a 2029 operating margin before plant adjustments of 37%. We assign Canopy a no-moat rating and stable moat trend, as it will struggle to earn economic profit as it spends on growth in the early-stage industry.

At current prices, we view shares as undervalued. Canopy offers two unique advantages. First, it will acquire U.S.-based Acreage Holdings, a verticalized cannabis company in 20 states, for $3.4 billion immediately upon a change to federal law, giving it entry into the largest and most attractive cannabis market. Second, a strategic investment from Constellation Brands can help Canopy develop cannabis-infused consumer products.

For more details on the cannabis industry and our market forecasts, please see our observer, “Green Rush: Cannabis Market Will Grow by 9 Times by 2030 Amid Widening Legalization.”