Better Pot Stock: Canopy Growth vs. Aurora Cannabis


The global pandemic, which affected almost every sector of the economy, was somewhat beneficial to the marijuana industry as lockdowns in many locations spurred cannabis sales. However, sales growth numbers in the US were better than Canada as some Canadian provinces are still facing regulatory hurdles limiting the number of legal stores (although more are set to open this year).

As cannabis sales increase, the industry becomes competitive. This year has already brought us some major acquisitions, both in Canada and in the US Perhaps the largest was the merger of the two Canadian players Aphria and Tilrayto create the “new” Tilray, which was completed in May. The Florida-based company‚Äôs recent acquisition of Harvest Health & Recreation Real cannabis was also a highlight.

But what are two of the most popular cannabis companies up to this year? Canadian player Aurora cannabis (NASDAQ: ACB) has been on a rollercoaster ride since 2020, while another Canadian company Canopy growth (NASDAQ: CGC) has asserted itself. But both are still unprofitable. Let’s take a look at their progress this year and determine which of these two pot stocks is the better buy now.

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Aurora Cannabis has a rocky road ahead of it

Despite last year’s cost-cutting efforts as part of its facility rationalization plan (which included closing down unproductive facilities and focusing on productive ones), Aurora still appears to be struggling. The final third quarter, ended March 31, saw cost savings of C $ 300 million and is expected to save an additional C $ 60 to C 80 million annually over the next 18 months.

It also managed to reduce SG&A expenses to $ 45 million, down $ 33 million from the same period last year in the third quarter. However, these achievements were not enough to make a profit. The company recorded earnings before interest, taxes, depreciation, and amortization loss (EBITDA) of $ 24 million, compared to $ 49 million in the third quarter of 2020. That’s a good sign, but not a strong indicator that it is headed for a recovery.

Despite an early mover advantage in the Canadian market, medical cannabis sales fell 17% year over year to CAD 36 million in the third quarter. Meanwhile, Canopy Growth in Canada had sales of $ 55 million for the fourth quarter of its fiscal year ended March 31.

Canopy has a strong partner in Constellation marks (more on that below), but Aurora doesn’t have a similar financier to fund its investment in producing high-margin cannabis derivatives – vapes, edibles, beverages, and more, which Canada legalized in October 2019 – that could help boost sales to increase. Total Aurora revenue for the third quarter decreased 25% year over year to $ 55 million. Recreational cannabis sales also declined 53% to C $ 18 million from the same period last year. The disappointing third quarter results don’t paint a good picture for Aurora this year.

Canopy Growth had a bad quarter, but it can still turn

Canopy, meanwhile, is on the path to transforming itself by cutting costs and generating positive EBITDA. The company has been working to grow its sales, which is evident in its latest quarterly results. In the fourth quarter of 2021, revenue increased 38% to $ 148 million from the same period last year.

However, sales growth needs to be consistent for the business to be profitable while keeping costs down. In the fourth quarter, the company managed to reduce its SG&A expenses by 25% year over year to $ 148 million, which helped reduce EBITDA losses from $ 102 million in the prior year period to $ 94 million. But it is still a long way from winning.

Canopy has focused heavily on developing innovative derivatives such as vapes, cannabis-infused chocolates, and beverages thanks to its US beverage giant partner Constellation Brands, which is the source of most of its financial boost. The cannabis drinks in particular have received good customer feedback and increased sales. For the full year, its tetrahydrocannabinol (THC) beverages captured 35% of the total beverage category in the Canadian recreational cannabis market. However, its ultimate destination is the U.S. cannabis drinks market, which will be a long time before federal legalization. Hence, for the time being, the company must focus on driving revenue growth in either Canada or international markets to achieve profitability.

An obvious choice

While no company has posted positive EBITDA yet, Canopy Growth is likely closer to its goal than its competitor Aurora. With support from Constellation, Canopy doesn’t have to worry about capital. If the company continues to keep its costs low and drive revenue growth with its high-margin derivatives, the chances are it could achieve positive EBITDA by the second half of fiscal 2022, which management has reassured its confidence.

Meanwhile, Aurora’s management anticipates EBITDA to be positive for the next 18 months. But because of Aurora’s history of failing to keep its promises, I find this difficult to believe – the company still has many challenges to overcome. Not only does it need to keep cutting its costs, it also needs to reduce the dilution of its stocks. Further stock dilution will only lower the stock price, as this is usually viewed as a sign that a company has failed to raise capital otherwise.

Right now, Canadian pot stocks are risky until they can turn a profit and prove they are worth investing in. Instead, I would suggest including their US counterparts – such as Curaleaf stocks, Green thumb industries, and Cresco Labs – in your portfolio; all are in a much more profitable position.

However, investors who still have faith in Canadian pot stocks (and have a strong risk appetite) should pick the better option among these two Canadian players. Canopy has a strong financial partner, growing revenue, innovative products, better opportunities in the U.S. and international cannabis markets, and closer to profitability – all of which make it a better cannabis choice in the long runrm.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.