Cowen Dives Into The Cannabis Industry: 'Large Market Opportunities'

Cowen has revisited its models for cannabis companies Tilray Inc. TLRY and Canopy Growth Corp. CGC amid volatility in the emerging market.

The Analyst

Vivien Azer maintained an Outperform rating on both Canopy Growth and Tilray. The analyst raised the price target for Tilray from $62 to $172 and raised the price target for Canopy's Toronto-traded shares from the U.S. dollar equivalent $57.17 to $63.35. 

Tilray shares were down 7.91 percent at $128.92 at the time of publication Tuesday. Canopy Growth's U.S.-traded shares were down 1.92 percent at $49.44. 

Long-Term Opportunity

The well-capitalized market has rapidly evolved and has four key verticals: adult use, beauty and nutraceuticals, pharmaceuticals and over-the-counter pain and sleep uses, according to Cowen. 

“We believe that all four of these verticals represent large market opportunities, and CPG veterans are beginning to embrace the broad market potential for cannabis as a global, multidimensional category given the talent migration to cannabis," Azer said in a Tuesday note. (See her track record here.) 

Consumer Trends

The valuation of both Canopy Growth and Tilray is rooted in an analysis of overall consumer trends, the analyst said. For example, there have been five distinct cycles in alcohol consumption over the last 80 years, she said. 

White spirits like vodka and gin have gained substantial market share over brown spirits like bourbon and whiskey, she said. Beer and spirits cycles tend to move in tandem, and should likely increase with the reverse bourbon trends, in Azer's view.

“As bourbon trends have reversed, we saw an increased shift to import and craft beer as consumers reverted back to drinking more flavorfully and expensively." 

Market Opportunity

The cannabis opportunity is far broader than what's created by the Canadian legalization of cannabis Oct. 17, Azer said. “Rather, we believe this is the first step toward the establishment of cannabis as a key functional ingredient touching multiple consumer categories.”

Volatility

Cannabis investing is still new and the industry is still taking shape, the analyst said. Consequently, volatility is a natural occurrence and not unique to this particular industry at this stage of development, she said. 

Valuation

When considering cannabis valuations, long-term durable growth must be considered, Azer said. 

“We caution that these valuation parameters and price targets are based on what we estimate about these companies today," Azer said.

"In the fast-evolving cannabis sector, dynamics can change quickly. The most recent example is beverage companies taking stakes in cannabis companies. While that dynamic was not completely unexpected, the timing of it perhaps was, and served as a fresh catalyst for the stocks.”

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