If you only evaluated marijuana stocks by their recent performances, The Hydropothecary Corporation (NYSEMKT:HEXO) would be a slam dunk over Aphria (NASDAQOTH:APHQF). The Hydropothecary's share price is up more than 25% so far in 2018, while Aphria stock has plunged more than 30% year to date.
But of course, recent stock performance isn't a smart way to pick future winners. Investors need to look at the business fundamentals and growth prospects of companies to determine which stock is in a better position to generate solid long-term returns.
How do Aphria and The Hydropothecary stack up against each other? Here's what you need to know about each of these Canadian marijuana growers.
The case for Aphria
No investor would want to buy the stock of a company with only 10.3 million Canadian dollars of revenue in its latest quarter and a market cap of US$2.2 billion -- unless that company had really tremendous growth prospects. That's the situation for Aphria. Investors are far more interested in the company's future prospects than they are its current sales and market cap.
What are those future prospects? We have to look at three different fronts. First, Aphria should be able to continue its strong growth from providing medical cannabis to the Canadian market, which is projected to be well over CA$1 billion within the next few years.
However, an even greater opportunity for Aphria lies in the Canadian recreational marijuana market. The country will begin allowing sales of legal cannabis for adult use in October 2018. Estimates for this market size range from around CA$4 billion to more than CA$10 billion annually.
But the biggest prize of all lies in the global medical marijuana market. Projections for this market size vary widely. One of the most objective estimates that I've seen is cannabis market research firm BDS Analytics' projection of a US$57 billion global medical marijuana market within the next decade.
Can Aphria claim a sizable share of these markets? It seems likely. The company is on track to be able to produce 225,000 kilograms of cannabis annually by early 2019. Aphria already has a presence in multiple international medical marijuana markets, most importantly in Germany. And it has a solid retail partner for the Canadian recreational marijuana market in Southern Glaziers, the largest wine and spirits distributor in North America.
The case for The Hydropothecary
The Hydropothecary has a much lower market cap of a little over $750 million. However, its sales also are much lower -- nearly CA$1.2 million in the latest quarter. But like with Aphria, the investing argument for The Hydropothecary is all about the future.
The company has a three-year strategy for growth. In the first year, The Hydropothecary intends to focus on the recreational and medical marijuana markets in its home province of Quebec, as well as expand into Ontario, Alberta, and Manitoba. The next year, the company plans to expand into British Columbia.
What about global markets? The Hydropothecary is holding off until year three of its strategy to move into selected international markets. The company wants to first establish large-scale distribution throughout Canada.
The initial part of this approach appears to be achievable. The Hydropothecary already has a five-year supply agreement with Quebec that will give it a 35% market share in the first year of recreational marijuana sales. The company anticipates having an annual production capacity of 108,000 kilograms by March 2019. It also is able to grow cannabis at a low cost, with an average cash cost of dried cannabis sold of CA$0.97 per gram in the latest quarter.
Successfully expanding into international medical marijuana markets might be the toughest component of the three-year strategy for the company to pull off. But if demand is as great as some predict, The Hydropothecary's capacity and low cost structure could make the company a winner in the global arena as well as at home.
Better marijuana stock
Both of these marijuana stocks look ridiculously expensive without racking up ginormous growth. However, the Hydropothecary's valuation looks more attractive, relatively speaking, since the company should have nearly half of the capacity of Aphria, but its market cap is only around one-third of Aphria's.
I think the more important factor, though, is which company is better-positioned to execute in the big scheme of things. That's where Aphria has an advantage, in my view. The company's acquisition of Nuuvera earlier this year gives Aphria a foothold in Germany and other markets. The Hydropothecary could find itself late to the party -- perhaps too late -- by waiting a couple of years before expanding internationally.
To be sure, Aphria must seize its opportunities both at home and across the world to justify its pricey valuation. It's possible that the company won't be successful. Still, I think Aphria has a better chance than The Hydropothecary of growing at a pace to enable its stock to keep moving higher.