Aurora Cannabis Inc. (TSE:ACB) has the scope, scale, and differentiation to take on the market leader, Canopy Growth Corporation (TSE:WEED)
SmallCapPower | October 24, 2017: For more than a year now, the cannabis industry has been the hot topic for investors given the impending July 1, 2018 legalization date in Canada. Consequently, the 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 Corp., 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 new players is Aurora Cannabis Inc. (TSX:ACB), which has the scope, scale, and differentiation to take on the market leader, Canopy Growth Corporation (TSX:WEED).
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Quarter-to-Quarter 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, Aurora Cannabis has delivered healthy, double-digit growth in terms of both revenue and grams sold. On the other side, incumbent Canopy Growth Corp registered just single-digit growth in its most recent quarter, which is expected as it is more mature than earlier-stage Aurora. Clearly Aurora Cannabis has an edge over Canopy Growth in this growth metric.
Both players had registered high growth rates of over 40% in the preceding quarters, which has come to a steady state in the most recent quarter. So investors can expect the steady state 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 capacity
There is currently a lack of supply in the industry. Additionally, the upcoming Canadian legalization of marijuana in July 2018 for recreational use 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, Canopy Growth produces six times more product than Aurora Cannabis, but future expectations look similar with both companies aiming for 100,000kgs by mid 2018.
Production Cost/Gram
Cost to produce will significantly define a company’s margin levels, so it is important to compare this metric for the most recent quarter. This is a factor that will scale in importance as revenues grow.
Clearly Aurora Cannabis wins in this metric. Canopy Growth spends over 30% more as compared to Aurora for production. Going forward, as both companies break-even on the operating level, Aurora Cannabis will be able to deliver better operating margins given its lower cost.
Valuation
Most of the Canadian cannabis stocks are trading at higher valuations due to the future expectations and the nascent stage of the industry. In terms of price-to-sales, Aurora Cannabis currently trades at a 23% premium to Canopy Growth. Aurora’s higher valuation can be justified given its high, double-digit revenue growth rate of 15%. Even though Canopy Growth generates 2x revenues as compared with Aurora Cannabis, going forward this difference may narrow and as investors focus on margins and the bottom-line, and Aurora with its low-cost production could be a more attractive investment of the two.
Recent Developments
Aurora Cannabis recently (October 2017) raised $60 million through equity bought deal financings to further execute its aggressive growth plan before recreational marijuana legalization arrives by July 2018, as well as to fund its international expansion program. Given the significant demand for this bought deal financing, the Company agreed to raise a further $6 million. Post the deal, Aurora Cannabis will have almost $220 million in cash, which is a significant liquidity boost to fund future growth plans. But on the other side of this ambitious growth plan and subsequent capital-raising programs is the significant dilution of the current shareholders’ interests in the company.
Canopy Growth recently (October 2017) announced plans to develop up to three million square feet of greenhouse growing capacity in British Columbia. This facility will help the Canopy significantly scale up the production footprint. On the international expansion aspect, the Company has announced its entry into the German, Denmark, Brazilian, and Australian markets. While the market in Canada is a large enough opportunity on its own, the potential of Canopy Growth to expand into international markets brings the scope of the available opportunity to a whole new level.
Conclusion
Overall, both companies have the potential to provide healthy returns for investors heading into recreational legalization. Aurora Cannabis has a slight edge given its aggressive plans with the recent investments in Germany and Australia. On the other hand, the incumbent Canopy Growth has similar plans to capture international markets and is also aggressively expanding its production capacity. Looking at the current developments, both companies have similar game plans for their production expansion and capturing international markets. Overall Aurora Cannabis could be considered more attractive from an investment perspective since it has a double-digit growth rate along with a low-cost production profile, which will enable Aurora to convert its top-line into profits at a faster rate than Canopy Growth.
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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