Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) are locked in a heated battle to dominate the Canadian marijuana market. The two companies boast the biggest marijuana production capacity in Canada, and that means they're both in line to win a significant share of Canada's fast-approaching recreational marijuana market. Is one of these two cannabis companies a better buy now?
Prepping for the future
Canada's medical marijuana market is tiny compared with the potential size of its adult-use market. Last year, only about 10% of the $4.3 billion spent by Canadians on marijuana was for medical marijuana. The rest was spent on black-market purchases for recreational use.
The size of the black market has many expecting a surge in sales for Aurora Cannabis and Canopy Growth when Canada's adult-use market opens for business on Oct. 17.
To make sure that they capture as much of the legal recreational market as they can, Aurora Cannabis and Canopy Growth have been investing heavily in acquisitions and production capacity.
At Aurora Cannabis, management is building state-of-the-art, highly automated greenhouses that can drive down marijuana production costs. For instance, at a cost of $150 million, its Aurora Sky greenhouse is adding 100,000 kilograms of annual production capacity with a forecast production cost below $1 per gram. It's also adding capacity via acquisitions, like its massive MedRelief merger earlier this year, which added about 140,000 kilograms of capacity. Altogether, Aurora Cannabis' production capacity is on its way to an estimated 570,000 kilograms per year.
Canopy Growth isn't sitting on its hands, either. It's on target for about 500,000 kilograms of production space across 10 facilities next year. Therefore, both companies appear neck and neck in terms of their ability to meet any ramp-up in demand with supply.
Revenue is accelerating
Canada's recreational market hasn't opened yet, but that hasn't prevented either of these companies from recording significant sales growth in the past year for dried flower and consumer products such as cannabis oils.
Aurora Cannabis has executed 15 acquisitions and combined with organic growth in the number of patients it serves. Its revenue jumped 223% to $55.2 million Canadian dollars last fiscal year. If you include the full impact of its MedReleaf deal, its sales were over CA$33 million last quarter alone. Importantly, 32% of its revenue last quarter came from oils, which benefit from more pricing power and offer better margin. Overall, Aurora Cannabis' active registered patients totals over 60,000, including MedReleaf, and its average net selling price of dried cannabis and oils was $8.02 and $13.52 per gram equivalent, respectively. One year ago, it reported average net selling prices of $6.79 per gram and $17.91 per gram equivalent for dried flower and oil, respectively.
For comparison, Canopy Growth exited its most recent quarter serving 82,700 patients and combined, serving those patients generated CA$25.9 million in revenue. Canopy doesn't break out sales per gram by dried flower and oil -- however, it did report that its overall price per gram sold was $8.94 last quarter, up from $8.43 per gram in the same quarter one year ago.
The fact that Canopy Growth counts more active patients gives it an edge now. However, it remains to be seen how much of that edge will be left once the recreational market opens. In the U.S., demand for medical marijuana has fallen off after recreational markets have opened.
Losses are mounting
Investments to fuel future growth are taxing each of these companies' financials. Aurora Cannabis and Canopy Growth are reporting losses, rather than earnings, and that's unlikely to change anytime soon because they're likely to continue to plow sales back into growth projects, including edibles and beverages, which could become available in Canada next year.
Nevertheless, investors can get some insight into each of these companies' profit potential by tracking their costs per gram of marijuana production and their gross margin.
Aurora Cannabis estimates that its "sky" class greenhouses will be able to produce at a sustainable cost below $1 per gram, but it's still miles away from that target because Aurora Sky is only now getting up to speed, so most of its production is at facilities that are costlier to operate. For instance, it takes 125 people to produce 4,800 kilograms per year at the Aurora Mountain facility, but once Aurora Sky is fully operational, it will need only 380 people to produce 20 times that much marijuana per year.
Since Aurora Cannabis is not yet reaping the benefits of its sky-class facilities, its cash cost to produce dried cannabis last quarter was $1.70 per gram. After all the puts and takes, its gross margin was 74% last quarter and 65% last fiscal year.
Canopy Growth decided earlier this year to stop breaking out cost per gram, but its gross margin was 43% last quarter and it was 52% last fiscal year.
As production scales at Canopy Growth, I suspect that its gross margin will improve, but for now, it appears Aurora Cannabis has the advantage, especially if its sky-class facilities deliver on their low-cost promise.
What's the verdict?
There's room for multiple marijuana stocks because the global market opportunity is $150 billion, including black-market marijuana sales. Nevertheless, I think Aurora Cannabis may be the better buy of the two right now.
Aurora Cannabis is on track to have the most supply capacity in 2019, and although Canopy Growth serves more patients, I think that advantage will decline in importance as medical-use patients shift their purchasing to retail marijuana stores serving the recreational market. Furthermore, Canopy Growth's gross margin isn't nearly as good as Aurora Cannabis, and while I think that growing scale will narrow the gap between it and Aurora Cannabis, it could take a while for that to happen.