The performance of OrganiGram Holdings (NASDAQOTH:OGRMF) stock trounced that of Aurora Cannabis (NYSE:ACB) in 2018. And OrganiGram is outperforming Aurora so far in 2019, too. Does that make OrganiGram the better stock? Not necessarily.
The reality is that the potential for marijuana stocks -- like stocks in any industry -- depend over the long run on business prospects rather than past gains.
Both OrganiGram and Aurora operate in a market that's expected to generate sensational growth for years to come. But which is the better stock to buy? Here's how OrganiGram and Aurora Cannabis compare on the key criteria that make a difference for marijuana producers.
A company can't sell what it can't produce. And with cannabis demand outpacing supply, production capacity is a critical differentiator for marijuana stocks. There's a clear winner between OrganiGram and Aurora Cannabis on this criterion.
OrganiGram appears to be in pretty good shape from a capacity standpoint. The company currently has an annualized production run rate of 36,000 kilograms, and by the fall of 2019, it expects its annual production capacity will soar to 113,000 kilograms. That's probably enough to rank the company in seventh place among Canadian marijuana producers in terms of production capacity.
But Aurora Cannabis is in an entirely different league on this front. Aurora already operates at an annualized run rate of around 120,000 kilograms. Its capacity should increase to 150,000 kilograms by the end of March. The company projects that its annual production capacity will top 500,000 kilograms by the middle of next year.
Canadian distribution channels
A company doesn't only need products to sell, it needs distribution channels for its products. Currently, the most important market for both OrganiGram and Aurora Cannabis is right at home in Canada -- especially the domestic recreational-marijuana market. OrganiGram has supply agreements with provincial crown corporations or retail partners for recreational marijuana in nine Canadian provinces.
Aurora's recreational marijuana distribution network covers 98% of Canada's population. The company teamed up with and invested in alcoholic beverage distributor Alcanna to operate cannabis retail stores to distribute its products.
Although Canada is the most important market right now for OrganiGram and Aurora Cannabis, over the long run, international markets will be much larger. It's imperative that marijuana producers establish operations in countries that have legalized medical marijuana to be in a position to capitalize on the growth opportunities.
OrganiGram has taken two key steps on the global stage. The company partnered with Alpha-Cannabis to target the medical marijuana market in Germany, which is the largest marijuana market outside of North America. OrganiGram also invested in Eviana, a Serbia-based hemp producer.
Aurora has been quite active on the international scene. It's a leader in the European medical-marijuana market. The company reported in its Q2 update that 6% of total cannabis sales stemmed from Europe. Aurora also has operations in Australia, Latin America, and South Africa.
OrganiGram posted a nice profit in Q1, but most of its earnings were due to fair-value adjustments on its biological assets. Aurora Cannabis isn't profitable yet.
Both companies have solid cash positions. OrganiGram reported cash and short-term investments of nearly 96 million in Canadian dollars (around $73 million) as of Nov. 30, 2018. Aurora Cannabis had CA$88.2 million (roughly $67 million) in its cash stockpile at the end of 2018, but also recently completed the placement of $345 million in convertible notes that bolsters its cash position.
Another key part of a marijuana producer's financial position, though, is its production costs. Companies that can operate at lower costs have competitive advantages over those with higher costs. OrganiGram claims to have the lowest production cost among licensed marijuana producers in Canada. Aurora also touts its low production costs as an important component in executing on its high-margin strategy.
It's admittedly difficult to assess the valuations of marijuana stocks because of the tremendous growth potential for the industry. However, OrganiGram's market cap of around $778 million is a little over one-tenth the size of Aurora's market cap of $7 billion. Based on projected annual production capacity for each company, OrganiGram gives a better bang for the buck.
Aurora Cannabis beats OrganiGram on most criteria, but when it comes to profitability and valuation, OrganiGram is the winner.
You could argue that it's just a matter of time before Aurora is profitable, too. And with the anticipated potential for the global cannabis market, Aurora's size and international reach could enable the company to grow so quickly that its current steep valuation won't matter.
However, the future hasn't arrived yet. We're living in the present. For now, I think that OrganiGram's advantages in profitability and valuation overshadow the pluses that Aurora Cannabis has in other areas. In my view, OrganiGram appears to be the better buy.