If you asked me which marijuana stock was the better pick between Aurora Cannabis (ACB -0.20%) and Canopy Growth (CGC -0.52%), I wouldn't have to blink an eye before responding. In my view, the clear winner is Canopy Growth.
But what if the choice was instead between Aurora and Canopy Growth's spinoff, Canopy Rivers (CNPO.F -9.92%)? That's an intriguing matchup, especially considering that Canopy Rivers was the hottest marijuana stock on the market in January and, despite a pullback, is still up big year to date.
Which of these two stocks is the better pick now? Here's how Aurora Cannabis and Canopy Rivers stack up against each other.
The case for Aurora Cannabis
Probably the best argument in favor of buying Aurora Cannabis is its tremendous production capacity. After Aurora reported its fiscal second-quarter results last week, I observed that "capacity is king -- and Aurora is wearing a crown." And it's true.
If you believe that the global marijuana market is going to become a lot bigger than it is now (and why wouldn't you?), it only stands to reason that the most successful players in that market will be able to deliver product to meet the growing demand. Aurora already claims an annual production capacity of 120,000 kilograms and is on track to boost its capacity to perhaps up to 700,000 kilograms per year.
Granted, production capacity isn't everything. A company also must have a global distribution footprint to succeed. But Aurora checks off that box, too. The company is a leader in the important German medical marijuana market. It recently shipped medical cannabis to the U.K. Aurora is active in Latin America and Australia. If there's a significant marijuana market to be found, Aurora is there or is on its way.
I think it's important to note that Aurora Cannabis has captured 20% of the market in the early days of Canada's recreational marijuana market. That's enough to rank the company at least in second place in terms of market share. My hunch is that Aurora will be able to replicate that position in the global marijuana market.
Let's address one big negative for Aurora in the past, though. The company has diluted its stock like crazy. And this dilution has hurt by reducing the value of existing shares. Aurora's bet was that the dilution was worth it to ramp up capacity and expand globally as quickly as possible. I suspect this bet will pay off over the long run. However, further dilution could diminish the appeal for investing in the stock.
There's one knock against Aurora that could actually work in its favor down the road. Unlike a couple of its key rivals, the company hasn't landed a partnership with, and significant investment from, a major player outside of the cannabis industry. The bad news is that this means Aurora doesn't have as much cash to fund expansion as, for example, Canopy Growth does. However, the good news is that Aurora is available as a top potential candidate for other major companies that might want to jump into the cannabis market.
The case for Canopy Rivers
Canopy Growth launched Canopy Rivers as an investment platform to go after opportunities in the global cannabis market. Canopy Rivers' diversification as a result of investing in multiple companies is probably the best reason to like the stock.
So far, Canopy Rivers has invested in 14 marijuana businesses. What's especially notable is that these businesses operate in several different parts of the cannabis supply chain.
For example, CanapaR is based in Canada but has a subsidiary that cultivates hemp in Italy. Greenhouse Juice Company markets plant-based food and beverage products with plans to launch products infused with cannabidiol (CBD). Headset provides real-time business intelligence and analytics services for the cannabis industry. Solo Growth is a premier retail cannabis distributor.
Canopy Rivers uses several types of investment structures. The company has frequently set up royalty streaming deals where businesses in which it invests agree to pay royalties on revenue generated. It has also invested in convertible debentures issued by its investment partners. Canopy Rivers in some cases has bought equity stakes in cannabis businesses.
The nice thing about Canopy Rivers' approach is that if one of the companies in which it invests doesn't succeed, Canopy Rivers won't take a huge hit. That's the beauty of diversification.
It also certainly doesn't hurt that Canopy Rivers is still closely aligned with Canopy Growth, which owns around 27% of its spinoff company. Canopy Growth allows businesses in which Canopy Rivers invests to have access to its distribution network, genetics, and strategic support. That's a big plus for Canopy Rivers in attracting the best portfolio partners.
Better marijuana stock
From a purely financial perspective, Canopy Rivers appears to be the better stock. The company posted a nice profit in its second quarter, boosted by a big gain in the fair value of its investment in Canadian cannabis producer TerrAscend. Aurora Cannabis recorded a big loss in its last quarter.
Both companies should have solid growth prospects. Canopy Rivers' investments across the cannabis supply chain, though, could give it an edge over Aurora.
Overall, I think that Canopy Rivers probably is the better marijuana stock over Aurora Cannabis, at least for now. However, the company is still only in its early stages. I'd rather wait and see how it performs for a while before calling Canopy Rivers as a buy for most investors.
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