For more than a year now, the cannabis industry has been the hot topic for investors given the impending Canada marijuana legalization legislation in July 2018. Consequently, the current valuations for many of the cannabis stocks are high and the companies have much to prove. As most marijuana stock investors know, the top spot in the cannabis industry belongs to the incumbent Canopy Growth Corporation (TWMJF), which has taken advantage of its branding, early Health Canada approvals for sale and export, and a first-mover position in the market.
This article is an edited ([ ]) and revised (…) version of an article by SmallCapPower.com to ensure a faster & easier read. It may be re-posted as long as it includes a hyperlink back to this revised version to avoid copyright infringement.
Today we will be comparing the current and future prospects of Aurora Cannabis Inc. (ACBFF) and Aphria Inc. (APHQF). These are the only two companies with the scope, scale, and differentiation to take on Canopy Growth. Each company produces marijuana differently and in different parts of the country, enabling them to better focus on gaining market share in their respective geographies.
Quarter-to-Quarter Revenue Growth:
For these companies, revenue growth is the most significant factor and it is quickly reflected in stock prices as quarterly reports roll out.
For the most recent quarter, both companies have delivered healthy double-digit growth in terms of both revenue and grams sold. Both players registered high growth rates of over 40% in the preceding quarters, which has steadied in the most recent quarter, so investors can expect the steady state of growth to continue at least over the next few quarters, until the mid-2018 recreational legislation is implemented, when the growth rates may be drastically different and higher.
Production and Supply
There is currently a lack of supply in the industry. Additionally, the upcoming Canadian legalization of marijuana for recreational use in July 2018, will further drive demand. Both companies are ramping up their production facilities but there will be a period of time before these facilities can come online so it is important to understand the production profiles of these companies.
Currently Aphria produces 67% more marijuana than Aurora Cannabis, but the future expectations look similar with both companies aiming for 100,000kgs by mid 2018.
The cost to produce cannabis will significantly define both companies’ margin levels, so it is important to compare this metric for the recent quarter. This is a factor that will scale in importance as revenues grow. (All costs in Canadian dollars)
Clearly Aphria wins in this metric. It is important to note the cost decline of 25% in the latest quarter for Aphria was possible due to the improved growing techniques. Due to low production costs, Aphria is able to make profits at the operating level and has recently posted its seventh consecutive quarter of positive EBITDA. On the other hand, Aurora is unprofitable at its current operating level.
Most Canadian cannabis stocks are trading at higher valuations due to future expectations and the nascent stage of the industry. In terms of price-to-sales, Aphria currently trades at a 15% discount to Aurora Cannabis, partly attributable to a slightly higher revenue growth rate for Aurora Cannabis. However as the revenue growth difference narrows and as investors focus on margins and the bottom-line, Aphria could be considered more attractive based on upside potential.
Aurora Cannabis recently (October 2017) raised C$60 million through equity to further execute on its aggressive growth plan before recreational marijuana legalization arrives in Canada by July 2018, as well as to fund its international expansion program. Post the deal, Aurora Cannabis will have almost C$220 million in cash, which is a significant liquidity boost to fund future growth plans, but the flipside of this ambitious growth plan and subsequent capital-raising programs is the significant dilution of the current shareholders’ interests in the company.
Even Aphria has been involved in various deals in recent days. The Company expanded into the U.S. market through subsidiaries to obtain a nearly 38% stake to target Florida’s medical marijuana market. Aphria also recently invested C$2 million into Nuuvera Corp. Nuuvera formed an agreement with Aphria to buy up to 17,000 kg of cannabis annually for C$4.0 million. As per the latest results, Aphria has ample cash reserves of C$160 million, which can be used to fund its growth plans.
Overall, both companies have the potential to provide healthy returns for investors heading into recreational legalization in Canada.
- Aurora Cannabis has a slight edge given its aggressive plans with the recent investments in Germany and Australia.
- On the other hand, Aphria’s competitive advantage lies in its low-cost production profile leading to strong operating margins.
Thus, Aphria could be considered attractive from an investment perspective since the sign of a healthy business is converting the top-line into profits, and making profits at the operating level at this nascent stage of marijuana industry.
Other Marijuana Articles from the munKNEE Vault:
Being able to sell products at a high margin is a good sign of efficiency. Doing so leaves more cash to dedicate to other expenses and service debt obligations. Identifying undervalued companies with strong gross margins in the young marijuana industry is important, given the upcoming Canadian legalization of marijuana for recreational purposes in 2018. Today we have identified 4 Canadian marijuana stocks that have underperformed their peers despite healthy gross margins.
Investing in marijuana-related stocks is a high-risk, high-reward game due to all the uncertainties surrounding the legalization of the drug. Companies that do succeed, however, have potential to bring large capital gains. That being said we have identified five Canadian marijuana stocks with the biggest upside potential, according to consensus analyst price targets.
Identifying companies with high gross margins in the young marijuana industry is important because operating costs are likely to decrease as the industry matures, leaving these companies with high earnings potential. Today we have identified five Canadian marijuana stocks with gross margins well above their industry peers.
Due to the early stages of the cannabis industry and its growth prospects, investors have not expected cannabis companies to generate positive earnings. Instead they have valued the stocks primarily on hope for a lucrative future. That being said, however, we have identified 4 Canadian cannabis stocks that are expected to generate positive earnings in the next 12 months. If they live up to their earnings expectations, it could begin a time when investors look for companies with sustainable growth prospects, as opposed to those that are expected to have the highest short-term revenue growth.
The Canadian marijuana landscape is about to change considerably in 2017. Canada’s government is in the process of allowing recreational marijuana across the country next year, so the number of customers the licensed producers can sell to should increase significantly by multiple folds in 2017 and 2018 and, as such, increasing their sales dramatically over the next few years as a result. Do you own any of the stocks of the 10 licensed producers there? If, not, perhaps you should consider doing so. This article outlines why.
The search is now on for the next junior marijuana stock that is ripe for acquisition. Will it be one of the 5 we’ve identified based upon their high revenue growth profiles?
With operations in the U.S. or a high probability of expanding there, the Canadian marijuana stocks on list are likely going to continue to feel a buzz from the recent U.S. election.
munKNEE should be in everybody’s inbox and MONEY in everybody’s wallet!
If you want more articles like the one above sign up in the top right hand corner of this page and receive our FREE bi-weekly newsletter (see sample here).