The legal marijuana industry is on fire. With the legalization of recreational marijuana among adults in Canada and the steady march toward legalization in several other Western countries, investors have been piling into pot stocks over the past few years with the hope of catching lightning in a bottle. 

Canadian pot titans Aphria (NYSE:APHA) and Aurora Cannabis (NYSE:ACB) are two prime examples. Both of these companies have seen their share prices rocket higher over the last three years, thanks to the industry's overall rising tide.

As this emerging industry becomes ever more legitimate, however, there's little doubt that cannabis investors will eventually begin to rely more heavily on fundamentals to guide their stock picks. With this theme in mind, let's consider whether Aphria or Aurora is the fundamentally more sound long-term buy right now. 

A hand holding a lit joint set against a green background.

Image source: Getty Images.

The case for Aphria

Aphria's value proposition centers around three interrelated issues:

  • Aphria has quickly become the third-largest producer of marijuana in Canada, with its annualized production capacity set to reach 255,000 kilograms by the end of 2019. That amount actually surpasses Aurora's current capabilities (approximately 150,000 kilograms per year), but Aurora is in the process of building out a much larger growing capacity that should become fully operational by mid-2020 (more on this below). 
  • Aphria's upper-echelon production capacity and greenhouse strategy have given it an early lead in terms of the cost of growing top-shelf cannabis. That said, the company's cost of production per gram has been rising in recent quarters due to the implementation of new automation techniques, and other growers like Aurora have been lowering their costs across the board as well. 
  • This pot company also sports regional distribution agreements with every Canadian province, plus the Yukon Territory. As a result, Aphria has direct access to approximately 99% of the entire Canadian cannabis market.

The big knock against Aphria is the company's recent spate of acquisitions that were deemed to be "worthless" by short-sellers Hindenburg Research and Quintessential Capital Management. Allegedly, these deals were undertaken for the sole benefit of Aphria insiders.

While it's hard to judge whether this short thesis has legs, Aphria has been unable to attract a deep-pocketed partner and two of the company's top executives did step down in the wake of these allegations.

Check out the latest Aphria earnings call transcript.

The case for Aurora

Aurora likes to bill itself essentially as a "one-stop shop for all your marijuana and cannabis needs." To make this sales pitch to investors and potential customers alike, the company has turned into a business development machine over the past two-plus years, racking up a whopping 16 acquisitions in the process. The latest was its acquisition of the well-known medical marijuana entity Whistler Medical Marijuana.  

This ultra-aggressive approach to business development has had two key outcomes to date:

  • Aurora now has the second-largest funded production capacity in the industry at over 500,000 kiliograms per year, and it also has business interests in literally every segment of the legal marijuana, cannabis, and hemp markets. Flat out, no other cannabis company has nearly as much market coverage as Aurora. An important offshoot of Aurora's decision to build out a horizontally and vertically integrated business is that its production cost should be among the lowest within the industry (less than 1 Canadian dollar per gram at scale).  
  • The flip side of the coin is that Aurora has also had to repeatedly dilute shareholders to fund this growth-by-acquisition strategy. As a result, Aurora's shares have lost significant value over the last 12 months, despite the company's market cap gaining a healthy 40.2% during this period. So, in the near term at least, Aurora's business strategy hasn't been particularly kind to current shareholders.

What's Aurora's end game? The core issue is that Aurora -- along with every other cannabis pioneer -- needs to find a viable way to differentiate itself from the crowd. Aurora, for its part, is betting that a jack-of-all trades approach will be the ticket to surviving the upcoming supply glut and corresponding margin compression in the not-so-distant future. 

Which stock is the better buy?

In this matchup, Aurora is arguably the better buy, given its diverse lineup of subsidiaries that include ICC Labs, MedReleaf, Whistler Medical Marijuana, among many others. While Aurora still has to put this motley crew of subsidiaries together to form a coherent whole, it should eventually be able to generate unique synergies, product offerings, and most importantly, cost savings. 

Aphria, on the other hand, comes off more as a company destined to be bought out for its large-scale, cost-effective production facilities. That's not necessarily a bad thing for investors looking for a quick buck, but Aurora definitely offers more from a long-term investing standpoint as things stand now.