Will Canopy Growth Get Acquired?
Key Points
Curaleaf recently announced plans for a takeover of Aurora Cannabis, a rival of Canopy Growth.
Canopy Growth is an iconic cannabis company in Canada with a strong position in the market.
Its business is similar in size to Aurora's, but it relies more heavily on the domestic market for its growth.
After seeing rival Aurora Cannabis (NASDAQ: ACB) receive a bid from large multi-state operator Curaleaf, investors may no doubt be wondering if Canopy Growth (NASDAQ: CGC) could be the next Canadian company that comes into the crosshairs of a larger U.S.-based business.
Canopy Growth has long been an iconic company in the cannabis market, particularly in Canada. Could an acquisition be looming in the near future?
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Why Canopy Growth may not be as attractive as Aurora
Investors may be wondering why Aurora was targeted and not Canopy Growth. They generate comparable revenue, and while Aurora is smaller in market cap ($235 million versus about $460 million), Canopy Growth's brand and iconic name may carry significant value.
But there's a key reason Aurora appears more attractive than Canopy Growth: its focus on international markets. Curaleaf sees it as a huge opportunity to grow and expand quickly.
Canopy Growth has a presence in countries outside of Canada, but its core business depends heavily on the domestic market. In its most recent quarter, which ended on June 30, Canopy Growth's cannabis revenue totaled 65.1 million Canadian dollars. Of that total, just CA$9.6 million, or less than 15%, came from international markets. The rest came from Canadian medical and recreational markets.
Aurora, by comparison, reported CA$43.3 million in revenue from international cannabis markets during the same period, accounting for 64% of its total net revenue of CA$67.6 million. The highly competitive consumer cannabis market accounted for just 3% of its revenue.
It's not hard to see why an acquiring company might prefer Aurora over Canopy Growth. The former has a more significant international business and far less exposure to the Canadian cannabis market, which simply isn't all that promising.
Canopy Growth may get bought out eventually, but that doesn't make the stock a buy
There's been considerable consolidation taking place in the cannabis market in recent years because, as companies have been struggling, others have been buying them for their assets at dirt cheap prices. It's a scenario that could play out for Canopy Growth. The bad news is that it may not happen until it falls further in value, at which point it might be more of a bargain buy for the company buying the business.
In the meantime, Canopy Growth stock remains highly risky. Investors shouldn't assume that an acquisition will happen anytime soon, and even if it does, it might be at a much lower valuation.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.