After following the cannabis industry for a couple years, Stifel analyst Andrew Carter launched formal coverage this week of Canada’s large-cap producers. He’s got Buy ratings on Canopy Growth stock (ticker: CGC), but thinks that Aurora Cannabis (ACB), Tilray (TLRY) and Cronos Group (CRON) only merit Holds.

“[T]hese companies represent the best investible opportunities in a global cannabis industry that we estimate could reach $200 billion in value,” writes Carter, in his Wednesday note.

Despite Carter’s high hopes for the industry, he sees rather modest near-term upside for Canopy stock, which he thinks could rise to 65 Canadian dollars from its recent level of C$55. And he sees some downside for Cronos shares, but believes that a drop in the stock should make it more interesting to investors, given his confidence in the company’s prospects.

He’s most cautious about the shares of Aurora and Tilray, seeing them as dependent on international opportunities for medical marijuana—which Carter thinks might develop more slowly than generally expected.

The Stifel analyst warns that these cannabis stocks are volatile and currently trade at generous enterprise values of 10-times their estimated 2021 year sales. Any pullback in the sector would be a problem for Aurora, which needs to raise capital to fund its ambitious production build out. But a sector pullback could benefit the well-funded Canopy and Cronos, says Carter, by allowing them to scoop up other companies on the cheap.

Canada’s recreational pot market should reach C$9 billion in annual sales by 2023, Carter notes, but it’s gotten off to a disappointing start. In the six months since Canada legalized recreational sales, the average revenue at its dispensaries have trailed those in a number of U.S. states—including Arizona and Florida, where cannabis can still only sell by prescription. “Sales suggest that very little of the illicit market has been converted,” Carter says, of the Canadian market.

He blames limited retail availability and unexpected difficulties encountered by Canada’s producers in producing and packaging pot. Revenue should pick up by the end of the year, he estimates, when Canada will allow the sale of cannabis edibles, vapes, and beverages. To reach his 2021 forecasts, however, the Stifel analyst acknowledges that the big four producers will have to expand their recent sales by some 10- to 30-fold.

The U.S. represents the biggest sales opportunity, but marijuana remains illegal under federal law. Federal legalization would spur U.S. sales to grow to $100 million a year by 2030, says Carter, or about half the world’s total. Canopy will be well positioned, after securing an option to acquire the U.S. cannabis operator Acreage Holdings (ACRGF). He thinks Cronos is the only Canadian outfit with enough cash to cut a similar deal with one of Acreage’s U.S. peers.

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