Written by SmallCapPower.com

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. 

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.

Production Cost/Gram

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.

Valuation

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.

Recent Developments

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.

Conclusion

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.