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Better Buy: Aphria vs. Aurora Cannabis

Keith Speights, The Motley Fool

Every stock has a story. Aphria's (NYSE: APHA) story is of a scandal-plagued Canadian cannabis producer that has quietly emerged as one of the more intriguing comeback candidates in the industry. Aurora Cannabis' (NYSE: ACB) story is about a giant that grew big by gobbling up one smaller cannabis company after another.

The most important part of the story for any stock, though, is the chapters that haven't been heard or read yet. Which of these two top Canadian pot stocks is more likely to have a happy ending for investors? Here's what you need to know about Aphria and Aurora that could make the most impact on how their stories turn out.

Cannabis leaf on top of a $1 bill.

Image source: Getty Images.

The case for Aphria

Pretty much every Canadian cannabis producer is enjoying solid revenue growth. But the bottom line is a different matter altogether for most of them. However, Aphria delivered a big profit in its latest quarter.

The main secret behind Aphria's success is its CC Pharma operations. Aphria acquired the German medical cannabis and pharmaceuticals distributor earlier this year. CC Pharma generated over three-fourths of Aphria's total revenue in the company's fiscal 2019 fourth quarter and made that nice profit in the quarter possible.

However, Aphria continues to enjoy strong momentum in the Canadian adult-use recreational marijuana market, too. The company reported recreational marijuana revenue of 18.5 million Canadian dollars in fiscal Q4, up 158% from the previous quarter.

Aphria appears to be in a great position to build on its strength in international markets. In addition to the CC Pharma acquisition, the company was awarded one of three licenses to cultivate medical cannabis inside Germany. Aphria Chairman and interim CEO Irwin Simon said in the company's Q4 conference call that Aphria expects to secure European Union Good Manufacturing Practices (GMP) certification for bulk and finished products in the first half of fiscal 2020. This will enable the company to export even more cannabis products to Europe and South America.

One open question for Aphria pertains to its U.S. strategy. So far, the company hasn't announced specific plans for entering the U.S. hemp CBD market. However, Simon mentioned in the Q4 call that Aphria is focusing on establishing strategic partnerships in the U.S. and expects to "generate strong growth in the U.S. over time."

Aphria is on track to have an annual production capacity of 255,000 kilograms. That impressive level ranks the company in third place among Canadian cannabis producers based on production capacity. But Aphria's market cap is only the fifth-highest in the industry. This gap reflects Aphria's relatively attractive valuation compared to several of its peers.

The case for Aurora Cannabis

Aurora leads the industry in the scramble to build capacity. The company expects to be able to produce 625,000 kilograms of cannabis annually by the end of 2020. This edge in production capacity is allowing Aurora to establish its products as leaders in key global markets.

The company's revenue growth reflects its leadership position. Aurora provided a sneak peek at its forthcoming fiscal 2019 fourth-quarter results last month. It expects to announce sales between CA$100 million and CA$107 million, up 59% quarter over quarter

Unlike Aphria, Aurora isn't profitable yet. However, Chief Corporate Officer Cam Battley stated in Aurora's fiscal 2019 Q3 conference call that the company expects to report positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fiscal 2019 fourth quarter. Battley said that Aurora is on a "pathway to profitability."

Aurora's success thus far stems primarily from the Canadian adult-use recreational market. The company should be able to keep up its winning ways, especially with the impending opening of the Canadian cannabis derivatives market. Aurora is focusing heavily on the cannabis vape market.

But Aurora is also one of the top players in the international cannabis market. It, along with Aphria, won a thumbs-up to grow medical cannabis inside Germany. Aurora already has EU GMP certified facilities and expects to complete construction of a large-scale production facility in Denmark next year.

It's still not clear what path Aurora will take to enter the U.S. market. The company is actively seeking partners from outside the cannabis industry and brought billionaire investor Nelson Peltz on board as a strategic advisor earlier this year to facilitate those efforts.

Better buy

Aurora is bigger, but I think there's a strong argument to be made that Aphria is the better stock. Aphria's high production capacity and lower market cap could make it more attractive for a major partner looking to make an equity investment. The company's CC Pharma business should continue to be a big plus.

There are plenty of risks associated with investing in marijuana stocks, though, and Aphria isn't an exception. The potential for a supply glut in Canada could hurt Aphria. So could slower-than-expected growth in any of the company's key markets.

My view is that Aphria is the better stock to buy over Aurora, but it's suitable only for aggressive investors with a high tolerance for risk and volatility. Aphria's story might end happily ever after, but it could be a bumpy ride in the meantime.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com