Cannabis stocks overpriced? No way, says BMO

The potential of the global cannabis industry is so vast that it could eventually make the sky-high valuations of some Canadian licensed producers look like bargains, according to a new report from the Bank of Montreal.

The bank’s cannabis sector analysts, Tamy Chen and Peter Sklar, sought to determine how big the total addressable market Canadian producers will be competing for in the coming years.

Assuming a blue-sky scenario in which the U.S. and all 28 nations in the EU legalize weed for recreational and medical use — and in which Latin America allows the medical use of pot— they project that in seven years the market could reach $194 billion, dwarfing the $5.9 billion in potential revenue they anticipate for the Canadian medical and recreational markets.

Currently, the biggest three licensed producers in Canada — Canopy Growth Corp., Tilray and Aurora Cannabis — have a combined market capitalization of more than $30 billion.

Pot stocks have taken a hit since Canada legalized recreational weed, as investors have seemingly reassessed the sector given product shortages, supply chain hiccups and a sense that it will take longer than expected to reach full capacity.

But if there’s hope for the sagging stock prices, it lies in the opportunities abroad, the BMO report suggests. “We believe current valuations for Canadian LPs are elevated when only the Canadian cannabis opportunity is considered,” the analysts wrote.

They believe that if investors start factoring in the potential of U.S. legalization on a federal level and legalization in the EU, the Canadian pot sector, as first-movers globally, could easily justify those high valuations.

Chen and Sklar forecast that in Germany — with 82 million people and which Canadian firms such as Aurora Cannabis and Canopy Growth Corp. are already exporting to — the medical pot market could produce more than $5 billion in revenue for global producers.

The BMO report arrives at the $5-billion figure primarily based on an assumption that in seven years, 7.5 per cent of sleep, anxiety and pain prescriptions in Germany will be replaced with medical cannabis, opening the market to roughly 26 per cent of the population.

The report also predicts the total addressable market if all 28 countries in the European Union legalize cannabis for medical use would be $30 billion in seven years, with another $68 billion if they also legalize recreational cannabis.