Canopy Growth Corp. (TSE:CGC) Stock: Why it Could Implode at $20 

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Valuing a speculative negative earner like Canopy Growth Corp. requires us to go beyond a simple P/E model

But before you get ahead of yourselves, know that the Canopy’s underlying fundamentals have completely decoupled from the stock’s incredible market cap. Currently, analysts are forecasting the pot market to hit estimated peak sales of $5-8 billion in 2020 and beyond (including recreational and medicinal); that’s if legalization goes off without a hitch.

Related: Canopy Growth (CVE:CGC) – Best Bet in a Budding Industry

Canopy, on the other hand, has rallied some 350% since August and is trading at a market cap of $1.87 billion, or 24-37% of the “dream scenario” peak market. While its growth prospects are admittedly very good (for example, its patient base increased 430% between 2015 and 2016 from 2,900 to 11,600), this market cap warrants an extremely bloated valuation that can’t be justified by even the most bullish forecasts.

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Furthermore, it’s a hard and fast rule in the markets that bloated valuations ALWAYS contract. For a perfect illustration of this point, we would have to go back to 1999 to focus on a hot, new commodity that was taking the world by storm: the internet.

During the peak of the Dot Com boom (and bust), internet companies were trading at 156 times earnings on average prior to crashing spectacularly; it is worth noting that it took the NASDAQ almost 15 years to climb back to the levels prior to the implosion.

Canopy is more expensive than most start-ups

However, valuing a speculative negative earner like Canopy requires us to go beyond a simple P/E model. In this case, we will have to turn to the enterprise value (the true value of a company taking into account its net debt and minority interest) to sales multiple, which is the preferred metric used by Silicon Valley in valuing start-ups with zero earnings.

Despite fuzzy start-up math, Canopy is trading at an incredible 68 times its FY 2016 sales as of writing, putting even the most overvalued Silicon Valley unicorns to shame; that’s impressive for a stock that is still cash flow negative.

Read the full article at: www.fool.ca