Aurora Cannabis Vs. Sundial Growers: Which Cannabis Stock Is A Better Buy?

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Investors are always on the lookout for companies that are part of disruptive industries and rapidly expanding markets. One such industry is cannabis and two stocks that are popular among marijuana investors are Aurora Cannabis (ACB) and Sundial Growers (SNDL).

Both of these stocks have seen double-digit losses in the past 3 months and are down over 90% from record highs. This has contrarian investors looking to possibly scoop up shares of these stocks at cheaper prices.  With that in mind, today I’ll analyze these beaten-down companies and see which of their stocks is a better buy today.

Aurora Cannabis disappoints with quarterly results

Aurora Cannabis recently disclosed its fiscal third quarter of 2021 results and reported sales of CA$55.2 million ($45.67 million) which was down 20.8% year over year. Its operating loss stood at CA$24 million, compared to a loss of CA$49.6 million in the prior-year period. Through its operating loss narrowed in Q3, it was below Wall Street estimates that forecast a loss of CA$10 million.

If we account for inventory write-downs and depreciation, Aurora Cannabis reported a gross loss of CA$72.4 million, compared to a gross profit of CA$22.9 million in the prior-year period. The company continues to burn cash and ended the quarter with a balance of CA$525 million. ACB also has $481 million in debt.

Aurora Cannabis has disappointed investors with widening losses and massive cash burn yet again. It was first estimated to report a positive EBITDA by the first quarter of fiscal 2021 but has not achieved its profitability targets. The company continues to lose market share in the recreational cannabis space which means it will not improve bottom-line by expanding top-line growth but via cost savings.

In order to offset a declining cash balance, Aurora Cannabis might raise capital through another massive equity raise which would dilute shareholder wealth in the process.

Analysts tracking Aurora Cannabis expect its sales to decline by 8% to $256 million in 2021. While the company’s top-line growth might increase by 26% to $325 million in 2022 there are several questions that need to be answered right now.

Sundial Growers

Sundial announced its Q1 results on May 11 and reported a gross margin of a negative CA$3.45 million. Its gross margin was negative even if we account for impairment and other fair-value adjustments.

Due to its abysmal profit margins, Sundial confirmed it would reduce its product portfolio and focus on higher-margin products going ahead. While its gross margin was in the red in Q1, Sundial reported a positive EBITDA for the first time. Comparatively, its net loss from continuing operations stood at CA$134.4 million in the March quarter.

After adjusting for certain line items such as inventory obsolescence, Sundial’s EBITDA was CA$3.3 million compared to a loss of $5.6 million in the prior-year period. The cannabis company also reduced its selling, general and administrative expenses by 35% to $8 million in Q1.

The verdict

Both Aurora Cannabis and Sundial Growers are looking to shift their product mix which will impact their revenue in the upcoming quarters. However, they need to post consistent profits to be considered as viable long-term investments. And currently, both companies are trailing peers and the broader market as the companies continue to grapple with a multitude of structural issues. Not to mention, ACB and SNDL have diluted shareholder wealth at an accelerating pace in the last two years and might continue to do so in the future given the negative profit margins. 

Therefore, my recommendation is to avoid both stocks.  Not only am I bearish on these companies but Wall Street is too. Analysts have a 12-month price target of $6.89 for ACB’s stock which is 26% below its current trading price. Comparatively, Sundial stock is trading at a premium of 15% to average analyst estimates.

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ACB shares were trading at $9.37 per share on Tuesday afternoon, down $0.29 (-3.00%). Year-to-date, ACB has gained 12.76%, versus a 12.62% rise in the benchmark S&P 500 index during the same period.

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