Aurora Cannabis (ACB 0.95%) is dominating Canopy Growth (CGC -2.43%) in stock performance so far this year. It's on track to beat Canopy in annual production capacity. Aurora is generating greater international sales than Canopy is.

But Aurora remains a distant second to Canopy Growth in terms of market cap. Despite Aurora's outperforming its top rival in several important ways, investors don't view Aurora Cannabis in the same way they do Canopy.

The bottom line is that Aurora still lags behind Canopy Growth. And last week, the No. 2 Canadian marijuana producer gave 750 million reasons why that's the case.

Two tall stacks of $100 bills.

Image source: Getty Images.

The dilution solution

On Tuesday, Aurora Cannabis announced that it had filed a preliminary base shelf prospectus in Canada and a corresponding shelf registration statement in the U.S. to raise up to $750 million by issuing new securities. While the types of securities that Aurora might issue include new shares, debt securities, subscription receipts, units, and warrants, there's one thing they all have in common: dilution in the value of existing shares sooner or later.

Aurora Executive Chairman Michael Singer stated, "Although we have no immediate intention of drawing capital against this Shelf Prospectus, we have introduced this option as a prudent and long-term strategic measure to provide us with flexibility in access to growth capital, if or when required, to continue executing on our global expansion and partnering strategy." In other words, the dilution, in this case, is likely to come later rather than sooner. But it's coming.

This latest move by Aurora effectively gives investors 750 million reasons why Canopy Growth still is in a different league. Canopy doesn't have to resort to issuing new shares or other types of securities to raise cash. The company can easily fund its global expansion strategy thanks to a $4 billion investment last year from big alcoholic beverage maker Constellation Brands.

Aurora's decision to file another shelf prospectus and shelf registration really is a symptom of a bigger problem for the company. It's expensive to invest in building operations across the globe in anticipation of a massive boom in legal marijuana sales. What makes the situation worse is that Aurora isn't profitable yet, so it still has to burn cash to fund ongoing operations as well. Dilution is about the only solution the company has available to keep up with Canopy.

Lagging behind

If you don't think dilution is a serious problem for Aurora, perhaps a couple of charts will change your mind. Take a look at how Aurora and Canopy compare in stock gains and market cap gains over the last three years.

ACB Chart

ACB data by YCharts.

The two marijuana producers are running neck and neck in terms of share price performance. But Aurora's market cap gain has more than doubled that of Canopy Growth. Why such a big discrepancy between the two charts? Dilution.

Of course, it's possible -- maybe even probable -- that Aurora wouldn't have delivered the share price gains that it did without its dizzying string of acquisitions that were fueled by issuing the new stock that caused all that dilution. But the important thing to know now is that Aurora remains in a position from which it must take dilution-causing steps, while Canopy doesn't have to do so.

We could already be seeing the impact of the gap in financial flexibility manifest itself. Canopy Growth announced in January that it's investing between $100 million and $150 million to build a large-scale hemp production facility in the U.S. Aurora, meanwhile, hasn't made any visible steps to enter the potentially lucrative U.S. hemp market. CEO Terry Booth has stated only that the company would "enter when it's proper to enter" the U.S. market.

Catching up to Canopy

Aurora Cannabis might not be consigned to becoming a perpetual No. 2 player, though. The main thing the company is missing to catch up with Canopy is a major partner. And there's good news on that front.

In March, Aurora teamed up with Nelson Peltz, the founder and CEO of multibillion-dollar investment firm Trian Fund Management. Peltz is now a strategic advisor to Aurora. His mission is to find partners for Aurora Cannabis among major companies that operate outside of the cannabis industry.

Peltz has plenty of connections in multiple industries, especially in consumer goods. At least one analyst raised his price target for Aurora because of increased confidence that the company would land a key partner with Peltz's help.

It remains to be seen if Aurora will indeed find one or more big partners outside of the cannabis industry. And the devil's in the details of any deals that might be made. But if Aurora Cannabis is ever going to be the clear leader running ahead of Canopy Growth instead of being a laggard, a huge partner is probably the best way to make it happen.