It's rare that investors get a chance to look at two future leaders in an industry expected to be one of the fastest growing over the next 10 years and decide which one they feel like buying.
Canada-based producers Aurora Cannabis (ticker: ACB) and Canopy Growth ( CGC) are the two biggest marijuana stocks now, and they look poised to duke it out in the coming years for the top position in one of North America's most ancient and most recent lines of business.
Let's break down these two rivals as they stand today. Which is the better marijuana stock to buy, Canopy Growth or Aurora Cannabis?
Canopy Growth (CGC Stock)
Canopy Growth wants to be the No. 1 cannabis company in the world, and as of now, it's certainly the most valuable, worth about $7.4 billion. The company, which aims to not just grow and sell marijuana, sees itself as a growing, global player in the industry, and aims to dominate the "derivatives" market. Derivatives are products infused with THC (weed's signature ingredient).
CGC is well positioned to do this, as its partnership with Constellation Brands ( STZ), the alcohol and beverage giant, gives it both a partner with expertise in that area and a huge war chest to create and sell such products.
This partnership left CGC flush with cash, as it currently has 4.5 billion Canadian dollars in cash ($3.37 billion). Much of it, however, is sitting there for the eventual acquisition of U.S. dispensary Acreage Holdings, a move Canopy hopes will give it an outpost in the U.S. when America decides to federally legalize.
For now, Canada remains the big market, and sales grew 250% year-over-year last quarter to CA$90 million.
That sounds great, but it's not nearly as fast as Aurora's sales growth, and it's also a pace of growth that's hamstrung by bureaucratic nonsense up north: Ontario, the largest provincial market in Canada, should have capacity for hundreds of retail outlets able to sell marijuana and infused products. But the Canadian government is handing out retail licenses at a glacial pace, bottlenecking the distribution network and forcing CGC to sit idle with an incredible amount of inventory it can't sell.
As a result, the number of stores is in the low double-digits.
Sales of derivative products offer a lot of potential -- CGC's partnership with Constellation Brands gives it a competitive advantage on that front, with cannabis-infused drinks being a major opportunity -- but they won't begin until late December. That not only misses the vast majority of the holiday season but also means that most of the financial impact from this new category won't be seen until the first quarter of 2020.
Aurora Cannabis (ACB) Stock
While rival Canadian pot stock Aurora Cannabis is worth less than CGC (about half as much, with a market cap of $3.8 billion vs $7.4 billion), it's growing much more quickly.
Sure, CGC's 250% sales growth last quarter is nothing to scoff at, but ACB nearly quintupled revenue over the trailing 12 months, with sales shooting from CA$55.2 million to CA$247.94 million.
ACB has been preparing strategically for a maximum-growth strategy, devoting careful focus to international expansion. In 2018 it completed the purchase of rival CanniMed, boosting its medical cannabis offerings, production capacity, research and development cred, patient count and established international presence.
Acquisitions have also given it a foothold in countries like Uruguay and Colombia. In Uruguay, ACB now has operations specializing in medicinal cannabinoid extracts and industrial hemp products, along with consumer cannabis.
ACB has also been buying up tons of land it hopes will provide economies of scale, allowing ACB to be the low-cost provider of marijuana.
Of course, the high growth that Aurora Cannabis is seeking and ACB shareholders have grown accustomed to comes at a price: much of ACB's acquisitions have been debt-financed, and with the company a long way from being profitable right now, share dilution has been another way Aurora's financed its growth.
Without a partner like CGC has in Constellation Brands, Aurora will have to keep diluting shareholders or going deeper into debt if it gets much more ambitious.
Whether ACB got a little manic trying to position itself as one of the best marijuana stocks to buy is up for debate, but a CA$3.17 billion in goodwill on its balance sheet would seem to indicate just that. Goodwill is the amount above tangible assets a company has paid for acquisitions, and ACB will soon have to write much of that off, which could be painful.
What ACB and CGG Shares Have in Common
Both Aurora Cannabis and Canopy Growth have boldly bet on the future of a high-growth industry and shown plenty of willingness to take risk.
Due to red tape not being removed by the Canadian government as quickly as many expected, these two elite cannabis stocks are sort of stuck waiting on their government to help fix the bottleneck.
The trickle of new retail licenses has forced analysts to reduce longer-term forecasts for both ACB and CGC. BMO cut its 2021 sales forecast for Aurora by 22% to CA$543 million ($425.2 million), and slashed Canopy Growth's 2021 sales forecast by 23% to CA$566 million ($443.2 million).
As the growth numbers for these two companies clearly show, there's a lot of opportunity in this market -- and this is just the beginning. Canada will eventually get its licenses rolled out, and when derivatives (think edibles, CBD products, even weed-infused drinks) get the greenlight later this year, ACB and CGC will both find new, much-needed ways to utilize their massive, growing inventories.
But the X factor remains the U.S., where these two companies are really jockeying for position.
When marijuana will become federally legal in the states is anyone's guess, but it seems likely that investors who buy ACB or CGC today on the idea of getting in on the ground floor of tomorrow's Anheuser Busch InBev ( BUD) of weed are overly optimistic.
Yes, both of these cannabis stocks are long-term plays, and patience is a virtue. But virtue isn't always rewarded in the markets, and at the end of the day cannabis is a commodity, plain and simple.
There's an old saying on Wall Street: "Pioneers get slaughtered, settlers prosper." ACB and CGC each carry enormous risk, especially as unprofitable, debt-fueled enterprises.
Should marijuana be federally legalized in the U.S. -- although whether that will happen in the next 10 years is certainly a gamble -- then there will be plenty of U.S. companies with enormous resources of their own that will cause these two Canadian marijuana stocks problems.
But enough gloom and doom. The opportunities aren't imaginary, and if one of these companies can seize first mover advantage, especially in the U.S., it could make for incredible returns.
CGC looks like the better marijuana stock to buy in that respect, due to its financial backing and expertise provided by Constellation Brands. In a commoditized space, the ability to create differentiated products like, say, a marijuana soda, will be key to determining a winner.
CGC is in a better position to do just that than ACB is. But if and when Aurora teams with a partner like Constellation, it may come time to reevaluate.
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