In case you aren't aware of it already, let me be the first to tell you: There's a battle brewing over marijuana north of the U.S. border, and the winning prize may be billions of dollars in revenue. Canada already has a well-established national medical-marijuana marketplace producing hundreds of millions of dollars in revenue for marijuana companies. But the real money will come from the country's recently opened recreational-use market, which the professional services firm Deloitte pegs to be worth as much as $4 billion Canadian in 2019.

With that much money up for grabs, it's little wonder many companies are racing to secure a lead in this market, but only about a half dozen of these companies are arguably best positioned for a shot at victory. Of them, two that ought to be on your radar are Aurora Cannabis (ACB -6.05%) and Cronos Group (CRON), because both are delivering breakneck sales growth. Is one a better buy than the other?

Marijuana leaves on top of a $100 bill


Sizing up sales

There's no denying Aurora Cannabis is the bigger of these companies so far. Thanks to an aggressive mergers-and-acquisitions (M&A) strategy, Aurora Cannabis reported over 35 million Canadian dollars in sales last quarter, including revenue from recently completed acquisitions. Cronos Group reported only CA$3.8 million in sales last quarter.

However, the two companies are growing differently. Yes, pro forma sales for Aurora Cannabis grew a whopping 333% year over year last quarter, but that growth was mainly due to acquisitions of competitors, rather than increasing demand for its existing marijuana products. Roughly CA$18 million of Aurora's CA$20 million year-over-year increase came courtesy of M&A deals. In contrast, Cronos Group's sales increased 186% to CA$3.8 million last quarter, and most of that growth was organic, rather than from costly acquisitions.

Aurora Cannabis can't be blamed for rushing to consolidate market share, so it has the scale to claim a big share of Canada's emerging recreational market from the get-go, but doing so has significantly diluted shareholders and caused its losses to mount. Aurora Cannabis lost CA$105 million, or roughly three times its revenue, last quarter, while Cronos Group's CA$7.2 million loss in the period was less than twice its sales.

At both companies, turning those losses into profit is the key to long-haul success. One way these companies hope to do that is by ramping up sales of high-margin products like extracts that offer better pricing power than dried flower. At Aurora Cannabis, extracts represent roughly 21% of its quarterly pro forma sales and at Cronos Group, 28% of sales were extracts last quarter.

Overall, Aurora Cannabis gets points in this battle because of its size advantage, but investors shouldn't ignore Cronos Group altogether, because it hasn't been nearly as acquisitive and its product mix is arguably better.

Potential production

Sky-high demand during the first weeks of Canada's adult-use market has resulted in supply shortages, suggesting that producers that can increase their marijuana growing and extraction capacity quickly will be the biggest winners.

Unsurprisingly, Aurora Cannabis is producing much more marijuana right now than Cronos Group. Last quarter, it sold 2,676 kilograms of cannabis, up 201% year over year, and its harvest increased 395% to 4,996 kg, giving it $80 million in inventory. That dwarfs Cronos Group, which sold just 514 kg of marijuana last quarter, up 213% year over year, and less than 1,500 kg through the first nine months of 2018.

Aurora Cannabis is also far ahead of Cronos Group in realizing production gains from investments in greenhouses and automation. Last quarter, Aurora's annualized production capacity stood at roughly 70,000 kg, but capacity should reach 150,000 kg early next year, and it could eclipse 500,000 kg in 2020.

For comparison, Cronos Group's annualized production capacity is roughly 6,650 kg now; including its ongoing projects, annual capacity is expected to increase to 117,000 kg per year.

Cronos Group's Peace Naturals brand is already cultivating cannabis at its new "Building 4"; that facility is expected to add 33,500 kg of capacity by the second quarter of 2019, increasing overall annual production to 40,150 kg. In the second half of 2019, its joint-venture greenhouse, Cronos GrowCo, should be complete, adding 70,000 more kg of production capacity.

If we consider those peak production targets, capacity for Aurora Cannabis will increase 614% in the next one to two years, while Cronos Group's production, including Cronos GrowCo, will increase an eye-popping 1,659%.

Marijuana growing in a greenhouse with fans overhead


And the winner is...

Aurora Cannabis has the scale to establish a loyal following out of the gate, but the recreational market in Canada right now doesn't allow for vapes, beverages, or edibles; those could dramatically shift market share and loyalties when they do become available, potentially as soon as 2019.

This means that Cronos Group's wholly owned subsidiary OGBC, which has launched the brands Cove and Spinach, could still challenge Aurora Cannabis in some provinces. Unlike Aurora Cannabis, which has licenses to sell to the recreational market throughout Canada, Cronos Group only has licenses in Ontario, British Columbia, Nova Scotia, and Prince Edward Island.

Nevertheless, it could be a bit of an uphill battle for Cronos Group. Until it proves it can deliver on its lofty production goals, I think Aurora Cannabis remains the better of the two stocks to buy.

Despite its spending, the 70% gross margin at Aurora Cannabis trumps Cronos Group's 56% gross margin, and Aurora's next-generation greenhouses should improve that margin advantage next year. Aurora Cannabis is also (relatively) cheaper than Cronos Group: Aurora’s valued at about 53 times its annualized sales last quarter, while Cronos Group is trading at about 105 times its annualized revenue last quarter.