Do you still believe the usual suspects that claim that Canopy is over-valued? Let’s continue down this rabbit hole …
In States, where Cannabis is legal, alcohol sales have fallen by 15%. 2017 stats are not available in Canada yet but the 2016 market was valued at C$22.1B. Let’s assume Canadians, known for their world class beer, wine, and spirits are not as quick to convert to Cannabis and the drop in sales is only 10% in year 1 or $2.21B. Canopy’s 20% market share is C$442M.
In this theoretical model, that gives Canopy a conservative revenue of around C$1.5B and assumes no M&A. Edibles and beverages are not expected to be legal until 2019 so we are not looking at any revenues from these sources but in our back pocket is a reminder that Constellation Brands owns 19% of Canopy. If the current stock price (or market cap) is the discount of future earnings and if we believe that C$1.5B in annual revenues is at the lower end then that ratio falls from 5.5 to 3.66. Earnings in this case are gross earnings and using revenues is a legitimate metric and is called the Price to Sales Ratio:
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What is the
'Price-To-Sales Ratio - PSR'?
The price-to-sales ratio is a valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues. It can be calculated either by dividing the company’s market capitalization by its total sales over a 12-month period, or on a per-share basis by dividing the stock price by sales per share for a 12-month period.