Pot stocks caught fire in early February on the back of a slew of positive earnings releases and some Reddit-fueled bullish chatter. Then, they quickly reversed course and turned ice cold. No marijuana stock was spared in the carnage.

Not even the industry’s most prominent and powerful company, Canopy Growth (NYSE:CGC). As of this writing, CGC stock is down almost 25%.

The good news? This dip in CGC stock is a gift.

For those new to this situation, pot stocks became technically overbought in early February after some of these stocks quite literally doubled in just days.

Now, these stocks are taking a much-needed breather and resetting back to more technically sound levels.

After this reset, we are going to see a divide form among marijuana stocks, wherein the fundamentally strong stocks rebound with vigor and the fundamentally weak stocks keep falling.

CGC stock falls in the fundamentally strong stocks category.

So let the dust settle, then buy the dip, and hold for what should be a breakout 2021.

Here’s a deeper look.

Canopy’s Blowout Numbers

Before CGC stock dropped 25%, it had basically doubled over the previous month, mostly because the company reported blockbuster third-quarter numbers in early February.

Those numbers confirmed that everything at Canopy Growth continues to trend in the right direction.

Revenues rose 23% year-over-year and 13% quarter-over-quarter. This continues what has been an impressive ramp in revenues all year long. The company has now reported three straight quarters of positive sequential revenue growth. Its growth is driven by market share gains in Canada, new beverage products and expansion into the U.S. market, where its Martha Stewart line of products is selling very well.

Gross margins clocked in at 26%, too. That’s up seven points quarter-over-quarter. Again, this continues a multi-quarter ramp-up in margins. In addition to its repeated sales growth, Canopy now has three straight quarters of positive sequential gross margin expansion under its belt. This expansion is driven by better demand, tighter supply and more favorable unit economics.

Further, Adjusted EBITDA loss was -C$68.4 million in the quarter. This also continues the favorable trend of shrinking EBITDA losses at the company. Canopy’s EBITDA loss has shrunk in each of the past four quarters, thanks to this new management team being hyperfocused on cost-cutting and rationalizing and streamlining business operations.

All in all, everything is trending in the right direction for Canopy Growth today. Revenues are ramping. Gross margins are expanding. Losses are shrinking. If all these trends persist, then Canopy will one day be a very big, very profitable cannabis grower.

This is a fundamentally strong company today — and the trend in CGC stock price will ultimately reflect that.

Sprinting Into Hypergrowth Mode

The best part about CGC stock is that the company’s robust third-quarter earnings report represents the beginning of this company’s growth narrative.

In short, driven by favorable legal developments unlocking new market opportunities, Canopy Growth will sprint into hypergrowth mode over the next few years. Such big growth coupled with strategic cost rationalization will produce enormous profit margin expansion, flipping Canopy into hugely profitable territory.

Management confirmed as much on the Q3 earnings call, noting that they expect revenues to rise at ~45% compounded annual growth rate between fiscal 2022 and fiscal 2024.

This compares to ~23% revenue growth in Q3, implying meaningful growth acceleration in the coming years. This acceleration is expected to be driven by continued easing of Canadian legal market restrictions pulling demand into the legal channel, and favorable developments in the U.S., Europe and Mexico creating new opportunities for Canopy to expand its business.

At the same time, management said that they expected adjusted EBITDA to pop into positive territory in the second half of fiscal 2022, and for EBITDA margins to clock in around 20% in fiscal 2024. That’s up from negative margins today. So, in essence, management is saying that big revenue growth plus their cost rationalization plans will drive huge profit margin expansion over the next several years.

This bullish medium-term broadly underscores two things.

One, the global cannabis market is finally coming into its own, thanks to favorable legal developments.

Two, Canopy has finally figured out how to capitalize on demand without spending an arm and leg to acquire customers.

Those two big picture takeaways are exceptionally bullish for CGC stock.

Valuation Upside for Canopy Growth Stock

The one knock against CGC stock up above $50 was that it was overvalued.

It wasn’t. But, down below $40, it’s significantly undervalued — meaning that this sell-off is creating a great entry point for long-term investors.

It increasingly appears that, indeed, Canopy will one day turn into a very big and very profitable consumer brand in the very big global cannabis market — something like the Altria (NYSE:MO) of marijuana. Assuming so, I see this as a $10-plus billion revenue company one day, with 30%-plus EBITDA margins. Under those assumptions, my modeling says that Canopy Growth could do about $5 in earnings per share by calendar 2030.

Based on a 23X forward earnings multiple and an 8% annual discount rate, that implies a calendar 2021 price target for CGC stock of over $60.

I think that’s where the CGC stock price will trend over the next 12 months, implying 50% upside potential from current levels.

Bottom Line on CGC Stock

The cannabis comeback is on, at the same time that Canopy Growth is figuring out how to capitalizing on surging demand without spending an arm and a leg.

That’s a powerful combination which should keep Canopy Growth’s revenues, profits and stock price on an uptrend for the foreseeable future. Today’s sell-off is a just a healthy reset in that upward trend. It will end. Once it does, CGC stock will get back to trending higher.

— Luke Lango

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Source: Investor Place