If you're looking to invest in the cannabis market, now's definitely a tough time, with most large-cap pot stocks witnessing significant losses over the past 12 months. Coupled with the fact that the majority of them are still struggling to break even, it's not surprising why so many investors are taking a step back from the market.
However, there still are some stocks out there worth investing in. Aurora Cannabis (ACB +1.16%) has lost much of its appeal, but at the right price, it could be a suitable investment. Another notable pot stock, Aphria (APHA +0.00%), has historically had its own issues regarding internal scandals. However, the company is one of the few that has reported a profit and is priced at a significant discount in comparison to its competition.
Let's take a look at both of these stocks to determine which is the better cannabis investment.
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Understanding Aphria's history and current position
Aphria has historically been a much-maligned pot producer, having suffered a particularly nasty scandal surrounding its Latin American acquisitions. The resulting damage to the company's reputation is one thing that has helped keep share prices cheap compared to other companies of a similar size.
Yet Aphria is extraordinarily cheap for its size, trading at a measly 3.5 times price-to-sales (P/S) ratio. In comparison, Aurora Cannabis is trading at a 9.9 P/S ratio, Canopy Growth trades closer to 28.5 P/S, and Cronos Group has a remarkably high P/S ratio of 81.7.
Diving into Aphria's financials, investors will notice that the company has been close to breaking even, sometimes even reporting a quarterly profit, over the past couple of quarters. In the company's fiscal second quarter (which ended Nov. 30), net loss came in at $7.9 million Canadian dollars. Over the six-month period, however, Aphria still is in the positive, with a net income of CA$9 million.
The main driver of Aphria's revenue isn't just its Canadian pot business, but a separate German subsidiary known as CC Pharma. This separate business, which distributes pharmaceutical products (including medical cannabis), has proven to be a proverbial goldmine for Aphria, with the majority of its revenue coming from CC Pharma. To put it into perspective, Aphria's cannabis sales in Canada came in at CA$39.8 million for the quarter, whereas CC Pharma brought in CA$86.4 million in comparison. This is a major selling point for the company, and considering the fact that Aphria won one of the three licenses to grow marijuana in Germany, there's definitely room for the company to grow in this market.
Couple that with the recent news that Aphria was awarded a certification that would let it ship medical cannabis to the European Union, and the company seems to be on decent footing. The only question now is whether Aphria will choose to get involved in the U.S. market, something that's still uncertain.
What's going on with Aurora Cannabis?
Aurora started 2019 on a strong note. As one of Wall Street's favorite pot stocks, the company seemed to have everything going for it. Unfortunately, continued quarterly losses have led many investors to lose confidence in the stock. Over the past few weeks, analysts have said that the stock could fall to $1 per share or even trade in the penny stock range.
Total revenues for the most recent quarter ending on Sept. 30 (first-quarter 2020) came in at CA$83.3 million with a net income of CA$10.7 million. While it might seem that Aurora has finally become profitable on paper, these figures include a previously unrealized gain of CA$143.8 million on derivatives relating to the company's stock price. In short, Aurora's plummeting stock price has allowed it to record a paper profit but isn't an accurate representation of the company's financial situation.
Aurora reported an EBITDA loss of CA$39.7 million for the quarter, a sizable increase from the CA$26.6 loss reported just three months prior. This seems like a better snapshot of the company's financial position, and at this rate, real profitability (as opposed to one-time accounting gains) seems pretty far away.
Diving deeper into the financials
It's worth mentioning that Aurora is facing something of a cash crunch. The company recently secured a sizable CA$360 million loan from Bank of Montreal to help keep its operations afloat. Much to the concern of investors, Aurora also announced it was halting the production of its newest cultivation facility, Aurora Sun, in order to save CA$110 million that otherwise would be spent on construction costs. In comparison, Aphria has a healthy CA$497.7 million in cash and cash equivalents and isn't burning cash at nearly the same rate that Aurora is.
There's also the question of goodwill. Aurora Cannabis has been on an acquisition spree for much of 2018 and 2019, aggressively buying out smaller cannabis companies, often at significant premiums. These premiums -- the difference between the combined tangible asset values and the price paid by a company -- get placed on the accounting sheet of the acquirer as goodwill. However, with the plummeting value of cannabis stocks and the changes in the market, its likely that auditors will end up adjusting the goodwill on many cannabis companies' balance sheets to a fairer, albeit much lower, value.
When comparing the goodwill of both companies, there's a substantial difference. Aphria has CA$670 million in goodwill. For a company with a CA$1.8 billion market cap, that works out to 37% of its value on paper stemming from goodwill. Aurora has a whopping CA$3.2 billion in goodwill on its balance sheet, more than eclipsing its $2.8 billion market cap.
What this means is that if auditors end up with a substantial goodwill adjustment for Aurora -- possibly to the tune of $2 billion, according to some analysts -- the company can easily lose most of its market value. In turn, the company's stock could very well plummet into the penny-stock range.
While this isn't a certainty, it's definitely a risk worth keeping in mind.
Which stock is the better buy?
Back in November, I argued that Aphria might be one of the best large-cap cannabis stocks on the market, beating out Aurora in the process. The situation with Aurora has only gotten worse. Between scrambling for fresh sources of financing, continued losses, selling assets, and the looming possibility of a major goodwill adjustment, there seem to be more problems surrounding this cannabis giant than ever before.
When considering everything that's been mentioned so far, it's hard not to seem too one-sided in evaluating these two companies. Aphria appears to be a much better investment at this time, with a much healthier financial situation.
