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Alliance Global starts Canopy Growth at buy; PT $75 (Canadian)

Alliance Global Partners launched coverage of Canopy Growth (TSX:WEED; NYSE:CGC) with a “buy” rating and $75 price target. The stock closed at $63.78 on May 10.

“We believe Canopy is well-positioned to become the global leader in cannabis, with the company already establishing itself as the market leader in Canadian medical cannabis, and early Canadian adult-use sales,” writes analyst Aaron Grey.

He considers Canopy’s acquisition of Acreage Holdings as a “critical game changer, providing the company with the opportunity to extend its market leadership into the world’s largest cannabis market in the U.S., subject to federal legalization/permissibility occurring within 7.5 years.”

In the early days of adult-use cannabis in Canada, Canopy has maintained its market leadership, amassing about a 30% share of the total market in the fourth quarter of 2018, more than 10 percentage points higher than the next licensed producer.

“While current market share is primarily indicative of production capabilities, we view Canopy’s R&D behind novel form factors as well as branding through a combination of products and retail, as allowing the company to maintain its market leadership,” he added.

Mr. Grey said that while Acreage Holdings now has exposure in 20 of the 33 legal cannabis U.S. states, “we believe Canopy’s acquisition price will end up a bargain,” with the end of cannabis prohibition, which “we expect to come within the 90-month timeline.”

While Canopy will not be able to deploy capital into the business, Acreage is able to use 58 million Canopy shares for M&A activity, and “we believe Acreage’s relationship with Canopy makes it an appealing partner,” he added.

Mr. Grey said Canopy has extended its leadership in Canada to global markets, in what are still the very early days of international medical sales. “The opportunities are vast and Canopy has positioned itself through a series of partnerships and acquisitions to be a key beneficiary.”

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