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

Abstract

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.