Neither Aurora Cannabis (ACB 1.43%) nor Charlotte's Web (CWBHF 2.16%) has escaped the bloodbath cannabis stocks experienced this year. Since early January, Aurora's shares have plunged by about 55%, while Charlotte's Web's shares are down by about 29% over the same period. By contrast, the S&P 500 index is up by 28% since the beginning of the year. While both companies have performed badly this year, let's dig into their operations and find out which of the two is likely to outperform the other from here on out.
The case for Aurora Cannabis
Aurora Cannabis is likely to become the leader in the Canadian market in terms of production capacity with a projected output of at least 625,000 kilograms per year. In addition, the company has managed to sign supply agreements with eight Canadian provinces. In other words, Aurora seems well-positioned to profit from the Canadian pot market, and although the dried cannabis market in Canada has faced a number of issues -- including a shortage of legally licensed retail stores -- Aurora could benefit from the derivatives market that recently opened north of the border. During the company's first-quarter 2020 earnings conference call, Aurora's chief corporate officer Cam Battley announced Aurora's initial portfolio of derivative products, which will include "vapes, concentrates, gummies, chocolates, mints and cookies."
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Beyond its operations in Canada, Aurora boasts a presence in the U.S. In August, the company completed the acquisition of Hempco Food and Fiber, in a deal valued at 63.4 million Canadian dollars ($47.4 million). With this acquisition, Aurora entered the lucrative U.S. cannabidiol (CBD) market, a market that's set to grow rapidly over the next few years. Further, Aurora's footprints extend to more than 20 countries outside North America; in particular, the company's presence in Germany is noteworthy.
Aurora completed the German tender process in April and started the construction of an indoor cannabis production capacity which, according to the company, should be completed by April 2020. Aurora encountered some headwinds in Germany recently. The company used radiation in its production process, which it had not received approval for yet. As a result, its cannabis medical sales were temporarily suspended by authorities. However, this obstacle won't hinder the company's long-term prospects in Germany, and Aurora's presence there remains a strength.
The case for Charlotte's Web
The signing of the farm bill at the end of last year made the market for hemp-derived CBD much easier to navigate, and Charlotte's Web is profiting from this market more than any of its peers. The company is the leader in the growing U.S. CBD market, with a presence in almost 10,000 retail stores across the U.S. at the end of the third quarter, a significant improvement from the 3,680 stores it sold its products in at the end of 2018. The company's CBD products are sold in ubiquitous pharmacies, including Kroger and CVS Health.
Charlotte's Web is increasing its production capacity. The company planted 300 acres of hemp last year and harvested 675,000 pounds of hemp. This year, the company planted 862 acres of hemp. Charlotte's Web's 40,000 square feet of capacity is currently being expanded to 137,000 square feet.
Despite making some serious headway in the U.S. CBD market, Charlotte's Web might encounter some obstacles. For instance, the U.S. Food and Drug Administration recently issued a press release warning consumers about CBD products. According to the health industry regulator, CBD products can have negative health consequences like liver injury, and the claims regarding the alleged health benefits of CBD -- including claims that it can cure illnesses like cancer -- are unproven.
Still, Charlotte's Web wasn't one of the companies reprimanded by the FDA for making unsubstantiated claims regarding the health benefits of CBD, and the company is setting itself up to profit from the CBD market when the FDA releases more regulatory direction regarding CBD products. Once these regulations are in place, Charlotte's Web claims it will be able to grow its portfolio of CBD products as well as expand its retail presence and distribution network in the country. In short, Charlotte's Web seems well-positioned to continue profiting from the U.S. CBD market.
Which is the better buy?
Given Charlotte's Web's leadership position in the U.S. CBD market -- and despite the shaky regulatory landscape surrounding this market -- the company is, in my view, a buy. But is it a better option than Aurora? I think so, and here are three reasons why.
First, Aurora's balance sheet isn't pretty. The company has more than CA$3 billion (about $2.3 billion) in goodwill due to a series of acquisitions, which could lead to writedowns that could have a negative impact on the company's bottom line. Aurora's balance sheet problems don't stop there; the company is significantly leveraged with more than CA$675 million (about $512 million) in long-term debt.
Second, while many cannabis companies had to resort to dilutive forms of financing to fund their growth efforts, Aurora has been one of the unfortunate leaders in this category, which could drag down the value of its shares in the future. Third, Aurora's most recent financial results weren't very good. In particular, the company's first-quarter 2020 revenue of CA$75.2 million ($57.1 million) represented a 15% sequential decrease, and it only recorded a net income as a result of unrealized gains on derivative liabilities of CA$143.8 million (about $109 million).
True, Charlotte's Web's latest earnings report wasn't particularly stellar either, with its revenue remaining flat sequentially -- at about $25 million -- and its net income of $2.2 million in the second quarter of 2019 turning into a net loss of $1.3 million in the third quarter. However, the company doesn't carry the same baggage on its balance sheet Aurora does: Charlotte's Web doesn't have any goodwill on its balance sheet and is less leveraged than Aurora, with long-term debt in the amount of $51.9 million.
For those reasons, Charlotte's Web looks like the better buy right now, and Aurora is best avoided.
