Canopy Growth Corp. (CGC), the first cannabis company to list on the New York Stock Exchange and now with a $13.6 billion market value, is positioning itself to conquer the U.S. Now that Canopy is a leader in the Canadian market, “they are now using the $4 billion in cash they got due to Constellation to get a route to control in the world’s biggest market,” according to Jefferies analyst Owen Bennett, as outlined in a detailed story on the company's strategy in MarketWatch, as outlined below.

To be sure, Canopy's strategy of sacrificing profits to invest heavily in growth is facing a major test. The challenge the company faces in executing in both the Canadian and U.S. markets is illustrated by its latest mixed quarterly earnings report. It beat revenue estimates but its losses widened, which sent the stock falling. Even with that decline, Canopy's shares were up about 47% year-to-date in early afternoon trading, crushing the broader indexes.

What It Means For Investors

But analysts view Canopy's longterm prospects as strong. Last year, the leading cannabis producer received $4 billion from alcoholic beverage giant Constellation Brands (STZ) for a 38% stake in the company. The company since then has made a giant step in the U.S. market. Despite regulatory hurdles, it purchased the rights to buy major U.S. company Acreage Holdings, with a market value around $3 billion, upon Washington taking a more relaxed stance toward cannabis prohibition. In the future, Acreage reportedly plans to begin selling Canopy’s Tweed and Tokyo Smoke brands in the U.S.

Currently, the U.S. government classifies cannabis with drugs like heroin, barring domestic industry players from traditional banking services and other activities.

CBD and Hemp Sales

Meanwhile, Canopy has already begun selling products containing the non-psychoactive hemp cannabidiol, or CBD, in New York state. Analysts at Piper Jaffray estimate the American CBD market at as big as $15 billion in five years, per Bloomberg. Instead of waiting for U.S. federal law to change, Canopy is getting a few steps ahead of the game by building out hemp operations in the U.S. When the time comes, the company should be able to “easily and quickly transform its legal hemp cultivation and processing facilities in the U.S. to handle cannabis,” per MarketWatch.

Bennett at Jefferies views Canopy’s Acreage deal as a “big positive,” expecting the deal to close in fiscal 2021 and contribute to fiscal 2022 revenue. Alongside Acreage, Canopy has warrants to two other U.S. operators, Terrascend and Slang Wordwide, which it can exercise upon the U.S. lifting its ban on recreational cannabis and, instead, leaning towards regulation.

Canopy's expansion may aggravate its financial losses in the short term. Last week, Canopy's Q4 loss was wider than expected. Most important, the company warned that its deal to acquire rights for Acreage will lead to a charge that will have a “materially negative impact on net income” in the first quarter.

Looking Ahead

Such growth pangs aren't uncommon for new companies in emerging industries. And Canopy is better positioned than most players to exploit the fast-growing cannabis market. Medical marijuana is now legal in dozens of countries and U.S. states, while recreational use is now legal in Canada, Uruguay and a number of U.S. states. The legal U.S. legal marijuana industry alone is expected to more more than double to $77 billion by 2022, according to Marijuana Business Factbook.