Marijuana stocks have hit a rough patch in the rear half of 2019. But there are still many reasons to like this group of stocks, especially when it comes to long-term buy and hold plays. After all, legal cannabis is expected to be the fastest growing industry in the world over the next decade.
Holds with this theme, Aurora Cannabis (NYSE: ACB) and Canopy Growth (NYSE: CGC) is locked in a heated battle to become the industry's alpha dog. Which of these pots is the better purchase in the long run? Let's look at the bull and bear case for each company to find out.
The Case of Aurora
Aurora has been a fan favorite among retail investors ever since its debut on the New York Stock Exchange last year. Potato's popularity stems from five important issues:
- With an estimated peak production capacity of nearly 700,000 kilos per year, Aurora is easily one of the largest pot breeders in the world. Aurora's massive scale, for its part, has already produced gross margins on the top shelf (58% over the last quarter), lower production costs for dried flowers and greater size of shares in both the medical and recreational market in Canada.
- Aurora's hitherto dripping 17 acquisitions have created important operating synergies across its diverse business. In theory, full integration of these units should further reduce production costs, giving Aurora a major competitive advantage over the wider field.
- Aurora has so far established a footprint in 25 countries. Leading among them, the company's acquisition of Pedanios, rewritten as Aurora Deutschland, gives it a starting point in Germany, a country with a population of over 83 million and cannabis-friendly health insurance.
- Aurora has built a thriving medical cannabis business, with its patient list of over 84,000 patients in the last quarter. This is an encouraging development, given that medical cannabis should prove far less vulnerable to margin compression than recreational or wellness products are.
- Unlike Canopy Growth and Cronos Group Aurora does not have a major share partner on board yet. While this strategic decision has forced the company to dilute early shareholders in a big way, Aurora has maintained its control over fate. The same cannot be said for neither Canopy nor Cronos.
All this boils down to is that Aurora's hyper-diversified business model should allow it to capture much of the global cannabis market – a market that could be worth as much as $ 200 billion by the end of next decade. It is a huge commercial opportunity for a company with a market share of $ 4.17 billion currently.
The bad news is that Aurora, along with almost all domestic peers, is facing some significant short-term headwinds right now. The slower roll-out of retail licenses for brick-and-mortar stores, along with the annual delay in legalizing derivative cannabis products as edible items, has kept the black market in Canada well operating.
The direct consequence is that Aurora may remain unprofitable for perhaps another full financial year, according to investment banking firm Stifel Nicolaus. As a result, Aurora will have to raise a significant amount of capital over the next two quarters. And that means more shareholder dilution.
Another important area of concern is Aurora's $ 3.11 billion in goodwill. Goodwill is the premium paid under an acquisition in addition to the company's tangible assets. In short, Aurora seems destined to incur a number of impairment charges in the coming quarters, thanks to the three-year-old consumer horse.
That said, impairment does not always affect a company's stock in the short term. . But large write-offs can lead to a crisis of confidence among major shareholders and keep key institutional investors on the sidelines. So Aurora's immense benevolence should certainly not be overlooked.
Canopy has three main selling points to potential investors:
- Canopy's high dollar partnership with the beverage giant Constellation Brands (NYSE: STZ) has made it one of the financially healthiest pot companies in the world. At the last count, Canopy sported $ 4.5 billion in cash and cash equivalents, although much of this war chest is earmarked for potential acquisition of US dispensary behemoth Acreage Holdings (OTC: ACRGF) .
- Canopy's association with Constellation is expected to produce some of the industry's most compelling cannabis-infused products. After all, Constellation has a well-deserved reputation for developing top brands for alcoholic beverages. The same should therefore apply to cannabis-based beverages.
- Canopy's acquisition of Acreage Holdings gives it a clear competitive advantage over top competitors such as Aurora when it comes to the US market, when it is only federally allowed to do so.
The two important takeaways are that Canopy is well positioned to be a formidable force in the derivatives market for cannabis products, and it has a good chance of turning Aurora into the power of the United States as well.
However, this best marijuana stock comes with a number of drawbacks. Canopy's gross margin has consistently been among the worst in the business, it is nowhere near making a profit on a steady basis, and there is no way to predict where the new CEO will lead the company in the years to come.
Furthermore, Canopy's potential upside could be harmed by its close association with Constellation. In short, Constellation can choose to stall the rest of Canopy well in advance of the global cannabis market really starting to turn into high gear.
Although both of these pot stocks are likely to continue to struggle for the time being, Aurora arguably offers the more compelling risk-to-reward ratio for long-term investors, at least as the case now stands. Canopy seems destined to become a subsidiary of Constellation well in advance of common stock realizing its full potential. By contrast, Aurora's stock should appreciate more or less in line with the broader legal cannabis industry – that is, the company eventually stops diluting its shareholders.