Comparing Canopy Growth (CGC 0.31%) against OrganiGram Holdings (OGI -0.29%) is a bit of a David vs. Goliath match-up. The former is the industry leader. The latter is still a fairly small player by comparison, as its revenue over the past 12 months would fall well short of what its counterpart generated in just its most recent quarter. OrganiGram's market cap is about $280 million U.S., meaning Canopy Growth is more than 20 times its size. However, one can argue that the smaller company may have much more growth potential left. Let's take a look to see if that's the case, and if OrganiGram could be an underrated buy.

Is OrganiGram generating enough growth?

The name of the game in the cannabis industry is growth, and that's one area where OrganiGram hasn't been doing so well lately. The company is coming off a brutal second-quarter performance where it didn't generate any growth and its losses only got bigger.

The company did see a quarter-over-quarter increase of 2.96 million Canadian dollars in its adult-use sales, a 19% improvement from the first quarter. But wholesale sales to licensed producers more than offset that, falling by CA$3.65 million, a 40% drop from the company's Q1 results.

A bar of chocolate with a marijuana leaf on top.

Image source: Getty Images.

Prior to Q1, growth was a lot easier to accomplish for OrganiGram and other Canadian cannabis producers because the prior-year numbers were from periods when the recreational market wasn't yet legal (the Canadian government officially legalized marijuana on Oct. 17, 2018). Now, with a more mature market and more competitors in the industry, generating revenue growth is only going to get more challenging. Cannabis giant Aurora Cannabis (ACB -1.80%) has scaled back its expectations so much that it is forecasting only "modest to no growth" for its upcoming quarter. A forecast like that would have been unheard of in the industry just a year ago.

Aurora's stock is down more than 90% in the past year, and concerns about growth aren't going to make it any more investable today. The Horizons Marijuana Life Sciences Index ETF (HMLSF 3.48%) is down 72% during the same period, while Canopy Growth is a couple of percentage points better than that.

Canopy's diverse business makes growth a lot easier

While the cannabis industry is struggling, Canopy Growth is proving again why it's still one of the best pot stocks to buy: diversification.

When the company released its third-quarter results back in February, its sales numbers were up by 49% from the prior-year period. However, this is a little misleading -- it hasn't been smooth sailing for Canopy Growth, either. The company's business-to-business recreational revenue declined by 11% from a year ago, from CA$60.1 million to CA$53.5 million. Its smaller business-to-consumer segment saw stronger revenue growth from CA$11.5 million to CA$15.2 million, an increase of 33%.

What made the difference for the company was its other segments. International sales of CA$18.7 million were nearly seven times the CA$2.7 million that the company reported in the prior-year quarter. Other revenue of CA$33.4 million was also more than four times last year's tally of CA$7.5 million. The growth in the other revenue segment largely came from the company's vaporizer brand, Storz & Bickel.

Which stock should you buy?

There's really only one main reason to consider OrganiGram over Canopy Growth, and that's valuation. At about 19 times its sales, Canopy Growth is not a cheap buy -- although that's down from its year-ago level of more than 60 times sales. By comparison, OrganiGram trades at a more modest 4 times its revenue over the past 12 months.

However, none of that means as much at a time when just surviving the coronavirus pandemic will be an accomplishment, and that's where OrganiGram has a big disadvantage. The company has a modest CA$41 million in cash and cash equivalents on its books as of Feb. 29. That's also how much cash it's used up in its operating activities over the past three quarters. There's not a whole lot of buffer there, and it could lead to trouble for OrganiGram down the road. The company's already laid off 45% of its staff, and deeper cuts could be on the way the longer the pandemic lasts.

Canopy Growth also laid off 500 of its workers this year, but it's still in a much better place. At the end of 2019, the company had CA$1.6 billion in cash and cash equivalents. Over a similar nine-month period to OrganiGram, the company burned through CA$548 million, or about one-third of the cash it has on hand today. Canopy Growth looks to be in a solid position to handle any cash challenges that may come its way over the next year. And that's without factoring in the fact that, unlike OrganiGram, the top cannabis stock also has a key partner in Constellation Brands (STZ 0.17%) that can help it navigate this challenging year.

With better growth, more diversification, and much more cash at its disposal, there's little doubt that Canopy Growth is the better long-term buy today.