Marijuana stocks have hit a rough patch in the back half of 2019. But there are still plenty of reasons to like this group of equities, especially as long-term buy-and-hold plays. After all, legal cannabis is widely expected to be the fastest growing industry in the world over the next decade. 

Keeping with this theme, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC) are locked in a heated battle to become the industry's alpha dog. Which of these pot titans is the better long-term buy? Let's look at the bull and bear case for each company to find out. 

Vie of the top of a flowing marijuana plant inside an indoor grow room.

Image source: Getty Images.

The case for Aurora

Aurora has been a fan favorite among retail investors ever since its debut on the New York Stock Exchange last year. The pot titan's popularity stems from five key issues:

  1. With an estimated peak production capacity of nearly 700,000 kilograms per year, Aurora is easily one of the largest pot farmers in the world. Aurora's massive scale, in turn, has already produced top-shelf gross margin (58% in the last quarter), lower cost of production for dried flowers, and outsize shares of both the medical and recreational cannabis markets in Canada. 
  2. Aurora's jaw-dropping 17 acquisitions to date have created important operating synergies across its diverse business. In theory, the full integration of these units should drive down production costs even further, giving Aurora a major competitive advantage over the broader field. 
  3. Aurora has established a footprint in 25 countries to date. Chief among them, the company's acquisition of Pedanios, rebranded as Aurora Deutschland, gives it an entry point into Germany, a country with a population of over 83 million and cannabis-friendly health insurance policies.
  4. Aurora has built a thriving medical cannabis business, with its patient roster exceeding 84,000 patients in the most recent quarter. That's an encouraging development, given that medical cannabis should prove to be far less vulnerable to margin compression than recreational or wellness products are. 
  5. Unlike Canopy Growth and Cronos Group, Aurora hasn't onboarded a major equity partner yet. While this strategic decision has forced the company to dilute early shareholders in a big way, Aurora has maintained control over its destiny. The same can't be said for either Canopy or Cronos.    

What this all boils down is to is that Aurora's hyper-diverse business model should allow it to capture a big chunk of the global cannabis market -- a market that might be worth as much as $200 billion by the end of the next decade. That's an enormous commercial opportunity for a company with a market cap of $4.17 billion at present.  

The bad news is that Aurora, along with almost all of its domestic peers, is facing some significant short-term headwinds right now. The slower-than-expected rollout of retail licenses for brick-and-mortar stores, along with the yearlong delay in the legalization of derivative cannabis products such as edibles, has kept the black market in Canada firmly in business.

The direct consequence is that Aurora may remain unprofitable for perhaps another full fiscal year, according to investment banking firm Stifel Nicolaus. Aurora, as a result, might have to raise a substantial amount of capital within the next two quarters. And that means more shareholder dilution.

Another important area of concern is Aurora's CA$3.17 billion in goodwill. Goodwill is the premium paid during an acquisition above and beyond the company's tangible assets. In short, Aurora seems destined to take a slew of impairment charges in the coming quarters, thanks to its three-year-long spending spree.

That said, impairment charges don't always negatively affect a company's stock in the short term. But large write-offs can lead to a crisis in confidence among large shareholders and keep all-important institutional investors on the sidelines. So Aurora's enormous goodwill certainly shouldn't be overlooked.  

The case for Canopy

Canopy has three main selling points to potential investors:

  1. Canopy's high-dollar partnership with beverage giant Constellation Brands (NYSE:STZ) has made it one of the financially healthiest pot companies in the world. At last count, Canopy sported CA$4.5 billion in cash and cash equivalents, although a big portion of this war chest is earmarked for the potential acquisition of U.S. dispensary behemoth Acreage Holdings (OTC:ACRGF).
  2. Canopy's pairing with Constellation is expected to produce some of the industry's most compelling cannabis-infused products. Constellation, after all, has a well-earned reputation for developing top alcoholic beverage brands. The same should thus hold true for cannabis-based drinks. 
  3. Canopy's acquisition of Acreage Holdings gives it a clear competitive advantage over top competitors such as Aurora when it comes to entering the U.S. market, once it becomes federally permissible to do so.

The two key takeaways are that Canopy is well positioned to become a formidable force within the derivative cannabis product market, and it has a good chance at beating Aurora to the punch in the U.S. as well.   

This top marijuana stock, though, does come with a number of drawbacks. Canopy's gross margin has consistently been among the worst within the industry, it's nowhere near turning a profit on a consistent basis, and there's no way to predict where the new CEO will lead the company in the years to come.

Moreover, Canopy's upside potential might be hurt by its close association with Constellation. In short, Constellation may choose to gobble up the remainder of Canopy well before the global cannabis market really starts to kick into high gear. 

Verdict

While both of these pot stocks are probably going to continue to struggle for the time being, Aurora arguably offers the more compelling risk-to-reward ratio for long-term investors, at least as things stand now. Canopy seems destined to become a subsidiary of Constellation well before its common shares realize their full potential. By contrast, Aurora's stock should appreciate, more or less, in lockstep with the broader legal cannabis industry -- that is, assuming the company eventually stops diluting its shareholders.