Better Buy: Canopy Growth vs. Aphria

The recent market crash wasn't kind to cannabis stocks. The industry benchmark, the Horizon Marijuana Life Sciences ETF (HMLSF 3.22%), is down by 29% since the beginning of the year. And while many will choose to avoid cannabis stocks altogether, others looking to dip their toes in these waters may look at Canopy Growth (CGC -3.01%) and Aphria (APHA) as two of the best picks within the cannabis industry. Year to date, Canopy's shares have slid by 24.2%, which compares favorably to Aphria, whose shares are down by 31.6% since the beginning of the year. Will Canopy continue to outperform Aphria moving forward? Let's see which of these two cannabis stocks is the better buy today. 

The case for Canopy Growth

Canopy holds the strongest market share in several Canadian provinces, including Ontario (the largest by population), Nova Scotia, and Alberta. The company is second only to Hexo (HEXO) in Quebec, which is the second-largest province by population. And while the recreational cannabis market in Canada has been a bit of a flop, things could reverse course for Canopy and its peers. The cannabis derivatives market, which officially opened late last year, could help marijuana companies improve their financial results significantly. 

Image source: Getty Images.

Cannabis derivative products often carry higher margins than recreational products, and thanks to its strong position in the Canadian market, Canopy could be one of the big winners. Last year, Canopy unveiled its portfolio of derivative products, which included a chocolate-infused cannabis product called Tokyo Smoke Pause. This chocolate contains two milligrams of tetrahydrocannabinol (THC). 

The company has also developed cannabis-infused sparkling water beverages, such as Quatreau Cucumber & Mint and Quatreau Passion Fruit & Guava. Each of these drinks contains 20 milligrams of cannabidiol (CBD). Canopy initiated the launch of its derivative products -- to be sold in legally licensed retail cannabis stores -- in December.  According to the company's CEO, Mark Zekulin, some of these products have been "selling out very quickly."

If things go right for Canopy, the company could leverage its position in its domestic market and record increasingly stellar financial results moving forward, and the stock could bounce back as a result.

The case for Aphria

With signed supply agreements with every Canadian province, Aphria is also one of the leaders in the Canadian cannabis market. The company continues to make headway in its home base of Ontario; in Aphria's third-quarter earnings conference call, the company's CEO, Irwin D. Simon, said the following: 

"We are increasingly connecting with consumers through our medical and adult-use brand's positioning and innovation to drive growth. We added 100 basis points to our market share in Ontario during Q3. We added 400 basis points to our share in Alberta. Aphria maintains a 77% share across all brands on vapes in Ontario. We increased our national share in each of our last four quarters."

With that said, the bulk of Aphria's revenue is still generated abroad. In particular, Aphria's Germany-based subsidiary, CC Pharma, accounts for a significant percentage of total revenue. During its latest reported quarter -- Q3 2020 -- Aphria's net revenue was 144.4 million Canadian dollars, with CA$86.8 million coming from CC Pharma. Aphria is currently expanding its operations in Germany by building an 8,000-square-meter indoor cultivation facility. The company had previously said that this facility should be fully operational by the summer of 2020.

Aphria's position in the Canadian market isn't as robust as Canopy's, but the former's strong presence in Germany makes up some of the difference. 

Comparing their financials

Canopy and Aphria have posted some of the most impressive financial results in the cannabis industry of late. Comparing some key financial metrics from both of these companies' latest reported quarters is instructive. 

Source: Companies' financial statements.

Aphria's cash balance is less than a third of Canopy's, but other than that, Aphria seems to be in a better financial position. Aphria's revenue, operating income, and net income all compare favorably to Canopy's. In Canopy's most recent quarterly update, for the quarter that ended Dec. 31, 2019, derivative products had yet to make a dent in its financial results. Aphria's latest quarterly update was for the quarter that ended on Feb. 29, 2020. Lastly, Aphria's valuation is significantly more attractive than Canopy's. Aphria is currently trading at just 2.5 times future sales, while Canopy is trading at a little more than 11 times its future sales.

Which is the better buy?

While I am still a bit skeptical of the cannabis industry as a whole, in my view, Aphria is a better pick than Canopy at the moment. Aphria's financial results have been more consistent, and its business is less exposed to issues in the Canadian market thanks to its strong presence in Germany. While Canopy remains the king in its domestic market, I think Aphria will outperform Canopy in the long run.