Aphria vs. Canopy Growth: Which Stock Has Better Growth Prospects?

Aphria Inc. (TSE:APH) is currently facing issues with U.S. regulators, while the online sales strategy of Canopy Growth Corporation (TSE:WEED) should boost revenues

SmallCapPower | October 31, 2017: For more than a year now, the cannabis industry in Canada has been the hot topic for investors given the impending July 2018 legalization. Current valuations for many of the cannabis stocks are high and the companies have much to prove. The top spot in the cannabis industry belongs to the incumbent Canopy Growth Corporation (TSX:WEED), which has taken advantage of its branding, early Health Canada approvals for sale and export, and a first-mover position in the market. However, the entry of new players has changed the competitive landscape, with the top players fighting for a share of the large opportunity with heavy investments in expanding their production capacity. One among those players is Aphria Inc. (TSX:APH), which prides itself to be one of the low-cost producers in the marijuana industry.

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So before going into the strategies of these two players, let’s look into the potential of the domestic recreational market along with the global market opportunities.

Domestic Recreational Market

As per a CIBC World Markets report, the potential value of the recreational cannabis market in Canada will range from $5 billion to $10 billion per year. The lower market value of $5 billion per year translates into yearly consumption of 770,000 kilograms of cannabis, assuming a price of approximately $6.50 per gram.

Global Opportunities

Now looking into the international markets, the image below gives an idea of how the global legalized cannabis market has evolved over the last few years along with the potential countries where we can expect legalization to happen soon.

While the market in Canada is a big enough opportunity on its own, the potential to expand into international markets brings the scope of the available opportunity to a whole new level.

Canopy Growth’s key growth strategies

Online Sales to capture the Recreational market

Canopy Growth believes that it will take two years and possibly longer to rollout the full network of regulated cannabis retail stores. With the anticipated importance of online sales, the Company launched the Tweed Main Street online store, a single online marketplace that enables customers to purchase cannabis from multiple producers across numerous brands.

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International Revenue Streams

Canopy Growth, with the assistance of international subsidiaries/partners, has secured the necessary agreements to export medicinal cannabis to Australia, Brazil, Germany, Denmark, Chile and Jamaica.

Production Capacity Expansion

Canopy Growth recently (October 2017) announced plans to expand production capacity by about 3.0 million sq ft in British Columbia. The Company is currently licensed to produce 31,000 kgs of marijuana and related products, and aims to triple that by July 2018.

Aphria’s key growth strategies

Strategic Investments

In August 2017, Aphria invested $11.5 million in Scientus Pharma, a vertically-integrated biopharmaceutical company. This investment will provide Aphria immediate access to Scientus Pharma dealer’s license in the short-term to enhanced global opportunities in the future. Also, Aphria recently invested $2 million into Nuuvera Corp. The fellow Canadian cannabis business, Nuuvera formed an agreement with Aphria to buy up to 17,000 kg of cannabis annually for $4.0 million.

International Revenue Streams

Currently Aphria had invested in the U.S.cannabis markets in 2016, but this investment is currently under scrutiny by the U.S. regulators due to legalization issue. Additionally, Aphria completed its first medical Cannabis oil shipment to Australia-based Medlab in October 2017. This first shipment of medical cannabis to Medlab is part of the Company’s global expansion strategy to create additional revenue streams.

Production Capacity Expansion

Aphria currently produces over 9,000 kgs of cannabis annually and aims to reach 30,000 kgs before the legalization date and reach 100,000 kgs by early 2019. Below is the snapshot from the Company’s latest presentation showing the future expansion plans.

Conclusion

Looking at the current developments, both companies have similar game plans for their production expansion plans. But Canopy Growth has a slight advantage given its better geographical presence in five countries as compared to Aphria, which has operations only in the U.S. and Australia. Aphria is also currently facing issues with U.S. regulators, which may put pressure on the U.S. investment. Additionally, Canopy’s online sales strategy is a much better way to capture the upcoming recreational market as opening retail stores will definitely take time. Overall, we believe Canopy Growth has better growth prospects given its current strategies.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own units in any of the companies mentioned above.

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