When it comes to capturing market share in Canada's emerging adult-use marijuana market, size matters. The company that produces the most cannabis is likely to command the most market share, and that's true whether we're talking about dried flower, cannabis oils, or (eventually) edibles and beverages. The battle for market share could very well wind up being determined by which company has product on the shelves, and following reports of widespread marijuana shortages in the first few weeks following Canada's recreational market opening last month, that's especially true.

While a lot can happen in this fast-growing market, Aurora Cannabis (NYSE:ACB) has Tilray (NASDAQ:TLRY) beat when it comes to production, and that could make it the better stock to buy.

Marijuana plants grow on top of a row of increasingly taller stacks of coins.

IMAGE SOURCE: GETTY IMAGES.

Just how big could this market be?

There's a lot of excitement surrounding the legalization of marijuana for good reason. In Canada, the recreational market could exceed 4 billion Canadian dollars in 2019, and if so, it would be six times bigger than Canada's medical marijuana market in its first year.

The opportunity in Canada, however, only scratches the surface of the potential worldwide. Although the U.S. market is fragmented because marijuana remains a controlled substance federally, 33 states have passed pro pot laws allowing for medical use, and 10 states -- including the nation's biggest state by population, California -- have passed recreational marijuana laws. As marijuana becomes increasingly mainstream in the U.S., a significant share of the $50 billion spent on cannabis will move from the shadows to cannabis company income statements.

The possibility of profiting from marijuana isn't limited to North America, either. The global marijuana market is worth $150 billion, according to the United Nations, and that's got wine and spirits maker Constellation Brands forecasting that legal marijuana sales could eclipse $200 billion in 15 years.

Production is paramount

Transitioning black market sales to highly regulated storefronts will require a lot of marijuana supply, and as Canada's adult-use experience is already demonstrating, newly established markets are likely to absorb whatever supply they can get.

Reports of out-of-stock marijuana have plagued Canada's recreational market in the early days, despite preparations that included investing hundreds of millions of dollars to build new greenhouses over the past year. The imbalance has prompted questions aimed at figuring out how quickly cannabis companies can increase production levels to match demand.

Of the major producers in Canada, Aurora Cannabis and Tilray are two companies that have seen their production climb the most in the past year, putting each of them in position to establish a lead over their peers. Recently, both companies reported quarterly financial results that offer insight into how much marijuana they have available to meet adult-use demand.

Aurora Cannabis is the larger of these two companies by far. It sold 2,676 kilograms of cannabis last quarter, up 201% year over year, and its sales were CA$35 million, including acquisitions. Tilray sold 1,613 kilograms of cannabis in the period, up 136% year over year, and its sales were only US$10 million (US$13 million at current exchange rates). 

The sales figures, however, aren't nearly as telling as the ramp up in kilograms harvested by these two companies when it comes to determining which company is positioned to profit most from Canada's recreational market this year. Why? Because the company that has the most inventory and production is going to see its sales soar as Canada's provinces seek to catch up to consumer demand.

Based upon the latest information, it's Aurora Cannabis, not Tilray, that has the necessary supply. Aurora Cannabis' harvest increased 395% to 4,996 kilograms last quarter, and as a result it was sitting on CA$80.8 in inventory. For comparison, Tilray's inventory was just US$12.1 million, despite its harvest increasing 215% to 5,032 kilograms in the quarter. Undeniably, Aurora Cannabis has far more inventory it can turn into sales this quarter than Tilray.

Marijuana grows in a greenhouse.

IMAGE SOURCE: GETTY IMAGES.

What's next

Aurora Cannabis has the early lead in terms of production, and if it can deliver on its production growth target, then its lead will increase. Currently, Aurora's annualized production capacity is about 70,000 kilograms, but it expects production capacity will reach an annualized pace of 150,000 kilograms early in 2019 and exceed 500,000 kilograms in 2020. Tilray is ramping up capacity, too, but its production target of 90,000 kilograms next year pales by comparison.

Admittedly, production isn't the only thing that matters when it comes to succeeding in this emerging industry, but the potential to keep retail shelves full suggests that, for now, Aurora's production advantage positions it to profit most from recreational demand in the coming year.

 

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.