The cannabis industry's rapid evolution and new strategic partnerships with mainstream brands reveal a far larger possible market for legal cannabis than investors and analysts first anticipated, according to leading consultancy, Cowen.
To follow is an excerpt from a recent story in CNBC.
You can view the original article here.
With Canada about to legalise recreational use of cannabis, it appears the market will likely be far larger than investors and analysts have anticipated.
"With cannabis, you're talking about this massive step change in terms of the addressable market," Vivien Azer said on CNBC on Wednesday. "You're bringing a $7 billion illicit market into the legal market and so it does require a different valuation framework."
Azer, the only cannabis analyst from a major Wall Street research house, nearly tripled her 12-month price forecast on Canadian marijuana producer Tilray this week to $172 from $62. The new target for the stock, which trades in the U.S. on the Nasdaq, implies more than 30 percent upside from current levels. She also upped her forecast on Canadian pot company Canopy Growth.
Just how big the market will get is tough to put a number on right now, but Azer cites a cannabis executive who estimated the market could be one day worth $500 billion.
"Our broader, big picture view of cannabis goes beyond the adult use launch in Canada," she wrote in a report this week. "Rather, we believe this is the first step toward the establishment of cannabis as a key functional ingredient touching multiple consumer categories with four key verticals: adult use, beauty and nutraceuticals, over-the-counter pain and sleep, and pharmaceuticals."
Recreational use of cannabis in Canada becomes legal on the 17th of October 2018, though each of the country's ten provinces will be able to regulate the market within their jurisdiction independent of Ottawa.
While it's still early days for the cannabis business, the first signs of its broader applications are easily recognised.
Tilray shares, which are up more than 650 percent since their July IPO, posted one of their best days ever mid-September after the company announced approval from the Drug Enforcement Administration to import weed to the U.S. for medical research.
The globe's major alcohol companies have also wasted no time exploring joint ventures with a handful of lucky cannabis producers.
Constellation Brands recently increased its investment in Canopy Growth with a 9.9 percent stake in the company, granting the Corona beer brewer a foothold in an industry it expects to soon be legal in the United States.
"We think that we're by far the best company in the world — or in the best position in the world of any company — to capitalise on what is absolutely without a doubt going to be a huge market over the next 10 years, hundreds of billions of dollars," Constellation CEO Robert Sands said in the company's earnings call Thursday.
"We expect to reap the benefits of our cannabis investment, which we see as being incremental to our core beer, wine and spirits portfolio," he added.
And while the upside for Constellation appears obvious, the benefit is two-fold. A check from one of the world's largest brewers is a welcome influx of capital for a handful of companies whose success will likely be defined by their ability to raise capital and scale production.
"Given the nascent stage of global cannabis, we believe that revenue growth should serve as the primary valuation methodology," Cowen's Azer said in her note.
Specifically, Azer said her primary measurement when drawing price estimates is enterprise value divided by sales, divided by revenue growth, akin to a traditional price/earnings growth ratio. Some Wall Street firms cover the cannabis stocks, but none the size of Cowen. It's still an emerging industry.