Analysts at Wall Street investment firm Jefferies weighed in on marijuana stocks for the first time this week. After considering the puts and takes, Jefferies gave the nod to buying top-tier Canadian cannabis company Aurora Cannabis (ACB -3.02%), but it's taking a pass on Cronos Group (CRON -3.97%) and rated Canopy Growth (CGC -1.36%) a hold. Here's what Jefferies is saying about these pot stocks.

A chance to dominate

Jefferies thinks Canopy Growth could dominate the global marijuana market, but it believes a lot of Canopy's opportunity is reflected in its weighty $15 billion market cap. Jefferies may have a point. Although the global marijuana market's worth $150 billion, most sales are done in the shadows. The legal marijuana market is only worth about $11 billion annually, and while Canopy Growth is growing fast, its current market cap means it's trading at a nosebleed-inducing 90 times trailing-12-month sales. According to Jefferies, Aurora Cannabis is the smarter stock to buy.

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Unlike Canopy Growth, Aurora Cannabis doesn't have a deep-pocketed partner, but its aggressive acquisition strategy still makes it a top-tier player.

In Q4, Aurora Cannabis' sales were 54 million Canadian dollars, up 363% from one year ago. The triple-digit increase was mostly due to Aurora Cannabis generating CA$21.6 million in recreational sales last quarter. The quarterly sales performance slots Aurora Cannabis' roughly 14% recreational market share behind Canopy Growth, which secured market share of about 38% during the first quarter of Canada's adult-use marketplace.

Despite the rapid growth, Aurora Cannabis' "story is less appreciated," according to Jefferies. Aurora Cannabis' $7.3 billion market cap values it at 56 times trailing-12-month sales, which is significantly cheaper than Canopy Growth.

Aurora Cannabis' valuation could get even more attractive as new production boosts sales this year. Its annualized marijuana production capacity is currently 120,000 kilograms, but capacity should reach 150,000 kilograms in March. If everything goes to plan, Aurora Cannabis will have 25,000 kilograms of marijuana available for sale exiting June. By comparison, Aurora Cannabis marijuana production was just 7,822 kilograms in the fourth quarter, up 57% from the prior quarter.

Ahead of itself

Jefferies struck a less optimistic tone about Cronos Group. Cronos captured investors' attention in December when tobacco giant Altria ponied up $1.8 billion to acquire a 45% equity stake. Cronos Group's relationship with Altria may be the best thing it has going for it right now, according to Jefferies.

Cronos Group is decidedly a second-tier player. Unlike Aurora, which could have 570,000 kilograms of peak annual marijuana production someday, Cronos Group has a publicly targeted capacity of only about 120,000 kilograms. To be clear, that's not shabby. It has a shot at being a top five Canadian producer. Nevertheless, its $3.8 billion market cap is 52% of Aurora Cannabis, despite its production goal being just 21% of Aurora's.

The stock's valuation gets scarier when you consider Cronos Group's third-quarter sales were only CA$3.8 million in the third quarter. That works out to a price-to-trailing-12-month sales of 388.

Check out the latest Cronos and Canopy Growth earnings call transcripts.

A marijuana leaf on top of a $100 bill.


What's next for these companies

There's a lot at stake for these stocks. Canada's marijuana market is worth CA$6 billion, and in 2019, a maturing recreational market could mean over $1 billion in new sales is up for grabs.

To capture as much of this revenue as possible, every one of the top marijuana stocks is plowing big money back into grow capacity and R&D. Sky-high spending suggests neither Aurora Cannabis nor Cronos Group will be turning profits anytime soon. But it may not matter.

Investors are more tolerant of losses when they're accompanied by breakneck top-line growth, and that's something that both companies should be able to deliver in 2019. If so, Aurora Cannabis and Cronos Group could both wind up being winners.