The fundamental valuation of Canopy growth corporation : finding value in the haze of legalization

2018

The purpose of this Master’s thesis is to perform a fundamental analysis of Canopy Growth

Corporation (TSX: WEED), analyse the Canadian cannabis industry and provide a valuation

of the company as at the 31.03.2018, and ultimately offer an investment recommendation for

a hypothetically well-diversified investor.

The Canadian government has announced that it will be opening the recreational marijuana

industry by the summer of 2018. The prospect of legalization has cause a gold rush towards

the industry, leading to high levels of investment and market consolidation. Licensed

producers have been racing to increase capacity to both compete in the market and become

least cost producers. Canopy has followed the trend, conducting M&A transaction and

building several new production facilities that will ensure they are the largest producer. The

company presented strong growth in the medical market however the upside prospects of the

recreational market far out weigh those of their current operations. The analysis also

included I a study the cannabis market in the state of Colorado as a proxy for determining

growth patterns following legalization of cannabis. A central component to the market

analysis was determining the overall market size, which still remains ambiguous as most

data comes from self-reported, and biased sources. Furthermore, I found that IFRS

accounting standards lead to miss representation of financial statements and pose problems

to identifying value for the uninitiated.

The valuation of the company was primarily based on two DCF models, one Enterprise Cash

Flow model and the other a Adjusted Present Value analysis. Based on a potential 20%

market share assumption and an estimated price per gram of $7. The company can be valued

at approximately $6B CAD, I have identified a target price of $32.64. This ultimately leads

us to offer an investment thesis recommendation of Hold or cautious Buy for a welldiversified

risk liking investor.