Can cannabis legalization in the U.S. help Canopy Growth (CGC) stock to hit $50 next year?

Canopy Growth Corp. (NYSE: CGC) is engaged in the production and sale of a range of cannabis products. CGC stock has performed reasonably well this year, particularly in November, after the company posted its financial results for the second quarter. 

Q2 financial highlights

Canopy announced smaller-than-expected loss for the three months ended September 30 along with strong revenue that was mainly driven by a surge in sales of recreational cannabis.

The company reported revenue of $135.3 million for the second quarter, up 24 percent from the same period last year. Gross margins in the quarter rose 19 percent on a year over year basis, while net loss came in at $96.6 million, as compared to earnings of $242.7 million in the year-ago quarter.

Speaking on the results, CEO at Canopy, Mike Lee said in a statement “our renewed strategy of winning consumer mindshare, along with increased agility and execution, has resulted in record net revenue for the second quarter and momentum across key areas of business. Canopy Growth is positioned for continued growth as we establish a strong leadership position that is showcased through our vast portfolio of differentiated brands and products – including our industry leading cannabis-infused beverages.”

Comparatively, adjusted EBITDA loss decreased to $85.7 million, narrower than a loss of $150.4 million in the comparable quarter, one year ago.

Operating expenses in the quarter fell 19 percent on a year over year basis. On the other hand, research, and development (R&D) costs increased by 19 percent, mainly due to several research studies conducted during the period.

If we analyze the performance of key units, medical cannabis sales in Canada rose 7.1 percent to $13.9 million, accounting for 10 percent of the company’s overall revenue. Comparatively, international medical cannabis sales slipped 3.4 percent to $17.5 million, accounting for 13 percent of the total revenue.

Canopy stock performance

Canopy stock has performed well in terms of growth in 2020. The stock started the year at a price of around $20 in January, though fell sharply in March to a price of about $10 after the Covid-19 outbreak. The price drop in March followed the company’s decision to shut its all Tokyo Smoke and Tweed locations due to the worsening Covid-19 situation back then.

The stock reached the pre-pandemic price levels in the subsequent months and rose to a price of around $20 in the last week of May, just before the company announced its financial results for the fourth quarter. Canopy’s share price fell more than 20 percent on May 29, the day company released its Q4 and full-year results.

The stock mostly traded under a price of $20 between June to October period, before nearing the $20 price mark during the last week of October, just before the U.S. presidential elections.

Canopy share price once again crossed the $20 mark in the first week of November after democratic party’s presidential candidate Joe Biden took lead in the elections over trump. His party’s vice-presidential candidate Kamala Harris vowed during the pre-election campaigns that they will make reforms to decriminalize marijuana in case their party won the elections.

Rival cannabis producers including Aurora Cannabis also rose in the first week of November after Joe Biden took the lead over Trump in the presidential elections.

Moreover, Canopy stock that traded under $20 price mark for most of the year is about to touch $30. The stock ended the day at $29 in the previous trading session after gaining 2.13 points.

Overall, the stock has climbed more than 37 percent on a year-to-date basis, about +44 percent over the last six months, and nearly 56 percent during the last 30 days.

Analysts coverage

If we analyze the price target estimates for Canopy stock, about 20 analysts have issued a price target outlook for the stock. The mean forecast for the company is $20.19 per share, with a maximum price target of $29.30, and a minimum price estimate of $13.50. If we talk about recommendations, most analysts have set a “Hold” rating for the stock.

Growth prospects

Canopy is considered one of the oldest and established players not just in its home country Canada, but several other international markets. The company started its operations back in 2013, the same year when Canada approved use of marijuana for medical purposes. Five years later, the country also legalized its use for recreational purposes.

The company has become one of the leading producers of cannabis with a major market share. There has been a lot of debate over the legalization of cannabis, especially over the past month. Many states in America voted in favor of cannabis use earlier this month. The rant has made cannabis stocks, the top hot stocks of the month.

As more people turn in favor of pot use in the U.S., investors have also turned increasingly optimistic about the future of cannabis stocks. Many of them are looking to invest in pot stocks to get benefit in future if majority states of America authorized the use of cannabis.

Canopy is the top marijuana grower of Canada, with dried cannabis share of more than 15 percent, and cannabis-infused beverages share of more than 50 percent in the home country. The company is also trying to expand in the United States with the help of its major investor and partner Constellation Brands (STZ).

Canopy’s financial figures have also been improving with time, particularly its revenue, which improved 77 percent on a year over year basis in the quarter ended Sept. 30. Moreover, its margins also increased to 19 percent in the latest quarter, significantly higher than just 5 percent in the same quarter of 2019.

The recent stock momentum and improving financial performance indicates that Canopy will continue to do well, especially with more countries legalizing both medical and recreation cannabis.