A new law and a new opportunity could mean great news for two very different marijuana stocks.
Aphria (NASDAQOTH: APHQF) ranks among the biggest marijuana growers. Auxly Cannabis Group (OTC:CBWTF), which until a couple of weeks ago was known as Cannabis Wheaton, doesn't. But both companies should soon enjoy tremendous sales growth thanks to the recent passage of bill C-45, which legalized the use of recreational marijuana in Canada.
Which of these marijuana stocks is the better pick for investors in light of this opportunity? Here's how Aphria and Auxly compare.
The case for Aphria
Let's first get the primary argument against Aphria stock out of the way: It's too expensive. It's true that the company claims a market cap of close to $2 billion with trailing-12-month sales of only a sliver of that amount. The only way that Aphria could possibly merit such a high market cap is if it could generate astronomical growth. The good news is that it probably can.
The retail market for recreational cannabis is scheduled to open throughout Canada in October. Conservative estimates call for aggregate sales of close to 5 billion Canadian dollars in the first year, but the actual market size could be significantly higher.
Aphria is cranking up capacity to meet demand. The company has also lined up a premier distribution partner for the retail market, Southern Glazer's, the largest wine and spirits distributor in North America. This relationship with Southern Glazer's gives Aphria a retail distribution channel in every Canadian province.
But Aphria isn't just looking at the Canadian market. The company hopes to grow rapidly in the German market thanks to a supply agreement with one of the largest pharmaceutical distributors in the country. Aphria has other relationships that give it a foothold in other international marijuana markets including Argentina, Australia, and Lesotho. If federal laws are changed in the U.S., Aphria should be ready to run thanks to its partnership with Liberty Health Sciences.
Arcview Market Research and BDS Analytics project that the annual global marijuana market could reach $57 billion in less than 10 years. Aphria would only need to capture a relatively small slice of that market to generate solid returns well into the next decade.
The case for Auxly Cannabis
Auxly Cannabis has a different business model than Aphria. While the company announced two acquisitions of small marijuana growers in recent months, Auxly's primary focus is on providing financing to cannabis businesses in exchange for royalties and a percentage of production. This royalty and streaming model is similar to what is done in the precious metals industry.
The company does business primarily with smaller marijuana growers. For example, Auxly has provided CA$55 million to Ontario-based medical marijuana provider ABCann. The small marijuana grower is using a large chunk of Auxly's investment to finance expansion efforts. In return, Auxly receives 50% of ABCann's production for 99 years.
The main argument for investing in Auxly is that the company thinks it can deliver impressive internal rates of return on the streaming deals it makes. Buying the stock is also a way to bet on global marijuana demand outstripping supply for years to come.
If supply doesn't keep up with demand, Auxly should have no problem selling the marijuana it receives from various streaming deals. The company should also be able to make a nice profit on these sales.
Auxly's market cap currently stands below $500 million. With the company anticipating annual production of around 230,000 kilograms from its streaming partners, there's a really good bang for the buck with the stock.
Better marijuana stock
I think Aphria is the better marijuana stock for one overriding reason. There's a real possibility that smaller marijuana growers could be squeezed after supply catches up with demand in the Canadian market. If and when that happens, larger companies will be in a much better position to survive and thrive.
My view is that Aphria will be fine if it comes down to a scenario like this. Auxly, however, could be in trouble if some of its streaming partners went under. It could be that this is an overly pessimistic view. Still, I think Aphria is the safer bet to be a winner over the long run.