Thursday is the day that investors in Canadian marijuana stocks have been anxiously awaiting. It's when the two biggest players in the cannabis industry -- Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC) -- announce their latest quarterly earnings results.
Canopy Growth will be first, with the top cannabis producer reporting its fiscal 2020 second-quarter results before the market opens on Thursday. Aurora plans to release its results after the market closes. But I suspect that Aurora is likely to emerge as the "winner" between the two companies, based on their respective quarterly updates.
Of course, Aurora and Canopy face very similar dynamics. It won't be surprising, therefore, if the two companies report similar growth trends.
Both licensed producers now have more production online. Aurora's advanced Aurora Sky and Aurora River facilities made a difference in the company's production capacity in the last quarter. Chief financial officer Glen Ibbott stated on the company's fiscal Q4 2019 conference call in September that Aurora expects a further uptick in production in the first quarter. Canopy Growth CEO Mark Zekulin also said on his company's fiscal Q1 2020 conference call in August that Canopy has "been focused on improving the supply of high-THC flower products" with higher production capacity.
Aurora and Canopy each face the same constraints in the Canadian adult-use recreational cannabis market, as well. In their last quarterly updates, both companies noted being negatively affected by the slow pace of launching retail stores in Canada's provinces.
Both cannabis producers also claim significant international operations. In the last quarter, Aurora's international medical cannabis sales totaled 4.5 million Canadian dollars, while Canopy Growth recorded CA$10.5 million in international revenue. Expect both companies to post higher sales, particularly in Germany, in their results later this week.
But some key differences
Despite the similarities, Aurora and Canopy Growth have several differences that set them apart. For one thing, Canopy ran into problems with shipping too many oil and softgel products in the last quarter. This caused the company to record a big adjustment in anticipation of product returns. Aurora hasn't experienced this kind of issue. It's possible that returns could be worse than expected, hurting Canopy's Q1 results, although I don't think this is likely to be a major problem for the company.
Canopy also has to make adjustments for the fair value of warrants owned by its big partner Constellation Brands. These adjustments caused nearly CA$1.2 billion of Canopy's net loss in the last quarter. With Canopy stock continuing to fall in recent months, look for another hefty adjustment that weighs on its bottom line. Aurora won't have this problem.
That brings up perhaps the biggest difference between the two companies when it comes to financial reports: Aurora is making progress toward profitability while Canopy isn't. Although Aurora didn't achieve positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization ) in its fiscal Q4 2019 as it had said it would, it nonetheless continued to move steadily toward achieving the goal.
By comparison, Canopy's adjusted EBITDA went in the wrong direction in its last quarter. The company doesn't anticipate generating positive adjusted EBITDA until 2022.
Advantage: Aurora (at least temporarily)
I think that after both companies provide their quarterly updates on Thursday, Aurora will come out on top. Sure, Canopy Growth could announce higher total revenue than Aurora. But investors are much more focused on the bottom lines of cannabis stocks than ever before. In my view, that's where Aurora should have the advantage.
That advantage could only be a temporary one, though. Investors are also highly focused on the negative impact of dilution. Aurora has a ticking time bomb coming up in March 2020, with CA$230 million in convertible debentures coming due. At this point, it seems very likely that the company will have to use a dilution-causing approach to pay off this debt. Canopy Growth, meanwhile, still has a boatload of cash, thanks to the big investment from Constellation Brands.
The most important thing for investors to keep in mind, though, is that one quarter isn't all that important in the scheme of things. Both Aurora and Canopy could be major winners as the global cannabis market expands. Which stock performs better this week will almost certainly be inconsequential down the road.