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Better Marijuana Stock: Aurora Cannabis vs. Cronos Group

By Keith Speights - Jan 25, 2020 at 7:34AM

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Which stock wins in a battle between these two top Canadian cannabis companies?

Aurora Cannabis (ACB 4.11%) and Cronos Group (CRON 3.01%) aren't exactly investors' favorites right now. Both stocks plunged in 2019, with Aurora sinking 56% and Cronos falling 26%.

However, the situation could look better for Aurora and Cronos in 2020. Which of these two marijuana stocks is the better pick now?

Two tiny shopping carts with a cannabis plan sitting on top of both carts.

Image source: Getty Images.

The case for Aurora Cannabis

Let's first address the biggest challenge for Aurora Cannabis -- its lack of profitability. The company's losses have caused it to borrow heavily and issue new shares, which dilutes the value of existing shares.

However, Aurora has quite a few things going for it. It claims the second-highest market share in the Canadian adult-use recreational marijuana market. The company is a leader in Germany's medical cannabis market. And Aurora ranks first among cannabis producers in production capacity.

Although Aurora isn't profitable, the company boasts the highest gross margin in the industry. In its fiscal 2020 first quarter, Aurora reported a gross margin of 58%. The company's high-tech cannabis facilities enable it to keep growing costs down. CFO Glen Ibbott noted in Aurora's Q1 conference call in November that the company "can compete strongly in any market situation and would still deliver healthy returns at pricing that would not be sustainable for others."

One major headwind for Aurora should die down considerably in 2020. The lack of an adequate retail cannabis environment in Ontario has been a big problem for Aurora and other major Canadian cannabis producers. However, the province is issuing more licenses for retail cannabis stores in 2020, a move that should significantly boost Aurora's recreational marijuana sales.

At the same time, Aurora should be a big winner in Canada's "Cannabis 2.0" market for cannabis-derivative products. The company has launched vapes and edibles, including baked goods, chocolates, gummies, and mints. Look for increasing Cannabis 2.0 sales for Aurora throughout 2020.

Aurora's lack of a major partner has hurt it in some ways. However, it also arguably makes Aurora a top team-up candidate for big consumer packaged goods (CPG) companies seeking to enter the cannabis or CBD markets. One Wall Street analyst even projects that Aurora's share price could double if the company picks up a major CPG partner.

The case for Cronos Group

While Aurora hopes to snag a big partner, Cronos Group already has one with tobacco giant Altria (MO -3.97%). And this partnership is probably the most important reason to consider buying Cronos stock.

For one thing, Altria's cash -- it invested $1.8 billion for a 45% stake in Cronos Group -- puts Cronos in a much better financial position than most of its peers, including Aurora. Although Cronos isn't consistently profitable yet (and any paper profits the company reports usually come with an asterisk), it shouldn't have to worry about raising additional capital with nearly 2 billion in Canadian dollars in cash, cash equivalents, and short-term investments.

The relationship with Altria also opens up lots of doors for Cronos. For example, Cronos will sell its new PEACE+ hemp CBD brands in the U.S. using Altria's retail distribution network. Thanks to the big tobacco maker, Cronos' CBD products will hit the shelves of close to 1,000 U.S. retailers.

Altria's big investment also paved the way for Cronos to acquire four of Redwood Holding Group's operating subsidiaries. This deal brought premium hemp CBD consumer products brand Lord Jones into Cronos' lineup. Lord Jones products are marketed in around 800 stores as well as online.

Cronos also has a different approach than most of its peers that many investors will like. The company has an asset-light strategy. CEO Michael Gorenstein said in Cronos' Q3 conference call in November that "our business model is not to be the farmer." Instead, Cronos' approach is to create shareholder value through research and development and building brands -- which is similar to what Altria has done in the tobacco market.

One example of Cronos Group's asset-light R&D strategy is its partnership with Ginkgo Bioworks. The two companies are working together to develop high-quality cannabinoids using fermentation processes, which could drastically lower the cost for producing cannabinoids compared to current extraction methods.

Better marijuana stock

Aurora Cannabis' revenue is much higher than Cronos Group's, but it has a lower market cap than Cronos does after being hammered in 2019. On the other hand, Cronos Group's balance sheet looks a whole lot better than Aurora's does.

I suspect that Aurora could benefit the most from potential catalysts in 2020. For this reason, my view is that Aurora gets the nod over Cronos Group for now. However, I also think that Aurora is the riskier of the two because it doesn't have the advantage of a major equity partner with deep pockets.

But while Aurora has the edge, I wouldn't call either of these stocks buys right now. I think that there are too many other marijuana stocks with more attractive risk-reward profiles.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$3.04 (4.11%) $0.12
Cronos Group Stock Quote
Cronos Group
$3.42 (3.01%) $0.10
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$51.09 (-3.97%) $-2.11

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