Canopy, Aurora, Aphria, and Tilray currently have a combined market capitalization of $41.6 billion with total TTM revenue of $220M. They are now bigger than Air Canada, WestJet, Canadian Tire, and George Weston, whose combined revenues are $83 billion.

Based on current valuation multiples, it appears as though the market is expecting that on October 17th every Canadian will rush out of their homes to the nearest dispensary and start lighting and baking the leafy greens like there is no tomorrow. All of a sudden, the dehydrated flower would have a place next to Campbell’s soup in everyone’s kitchen cabinets. If this is not the case, what could explain the sky-high multiples being placed on names like Canopy and Tilray?

In just one year, Canopy, Aurora, Aphria, and Tilray have seen their combined market capitalization risen by $37.5 billion to $41.6 billion. The average of their EV/Revenue multiple currently is 234x. This means that the market is placing a value of $234 on every $1 that the company earns in revenue.

Weed Stocks Valuation

To put this in perspective, the total value of the four cannabis stocks is still $5 billion larger than the value of Air Canada, WestJet, Canadian Tire, and George Weston combined. The weed stocks, however, produce only $220 million in TTM revenue while the non-weed group produces $83 billion.

Even the FANG stocks have never received such phenomenal valuations. The highest EV/Revenue multiple that Facebook, Amazon, Netflix, and Google ever received were 21x, 41x, 14x, and 6x, respectively.

These off-the-charts multiples can largely be attributed to the notion that the market is expecting demand to outpace supply. A research being conducted at the University of Waterloo and C.D. Howe Institute suggests that 610 tons of pot will be demanded in Canada whereas only 210 tons will be supplied in the first year. Even if 610 tons were supplied, the market size would only amount to $6.1 billion (assuming $10 price per gram), a fraction of the current capitalization of these companies.

Alpha Insights

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