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Better Marijuana Stock: Aurora Cannabis vs. Cronos Group

By Keith Speights – May 23, 2020 at 7:52AM

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Which stock wins in a battle between these two well-known Canadian cannabis producers?

Aurora Cannabis (ACB -1.64%) stock has skyrocketed by a triple-digit percentage in recent days after the Canadian cannabis producer reported better-than-expected fiscal 2020 third-quarter results. You might think that after this huge gain, Aurora is outperforming rival Cronos Group (CRON 0.00%), which posted Q1 results earlier this month that were below expectations.

But that's not the case. So far this year, Cronos has delivered a stronger year-to-date return than Aurora has. However, Aurora certainly has greater momentum right now. Which of these two marijuana stocks is the better pick going forward? 

Tiny shopping cart with a cannabis leaf in it

Image source: Getty Images.

The case for Aurora Cannabis

Aurora's surprisingly positive Q3 results underscore the potential for the company. Its revenue growth was strong across all categories in the midst of a challenging business climate caused by the COVID-19 pandemic. What was especially encouraging was that the company was able to quickly adapt to changes in the Canadian adult-use market and launch a successful value brand that drove sales growth in the quarter.

As life slowly returns to normal, Aurora's sales should pick up even more. The company is already seeing good results from the launches of its products in the Canadian cannabis derivatives market. This new market should pick up momentum in future months.

The company also continues to be a major player in European medical cannabis markets, especially Germany. After a temporary suspension of its license in Germany due to a permitting issue, Aurora's international sales roared back in Q3. The company's strength in the German market should be a solid springboard to grow as other European medical cannabis markets expand.

Even after scaling back some of its plans, Aurora remains an industry leader in production capacity. Its high-tech facilities also enable the company to keep its costs per gram low. And Aurora's products enjoy strong consumer demand, with several of its brands commanding leading market share.

Although Aurora continues to lose money, it expects to generate positive adjusted EBITDA in its fiscal 2021 first quarter, which ends on Sept. 30, 2020. That's a major step on the path to achieving consistent profitability.

The case for Cronos Group

Probably the strongest argument for buying Cronos Group stock is the company's close relationship with tobacco giant Altria (MO -3.67%). Early last year, Altria invested $1.8 billion in Cronos, gaining a 45% stake in the cannabis producer.

Cronos' partnership with Altria has given it a stronger financial position than most of its rivals in the Canadian cannabis industry. The company had cash, cash equivalents, and short-term investments totaling more than $1.3 billion as of March 31, 2020. 

Altria's funding enabled Cronos to acquire Redwood in September 2019. The deal gave Cronos a solid position in the U.S. hemp CBD products market with Redwood's Lord Jones products. Although the COVID-19 pandemic has hurt sales of these products, this is only a temporary problem for Cronos. Over the long run, the CBD products market should be a solid growth driver for the company.

Cronos should have great growth opportunities both at home in Canada and in international markets. Its launch of cannabis vaporizers for the Canadian "Cannabis 2.0" market has been successful so far despite headwinds from the COVID-19 outbreak. The company's Natuera joint venture in Latin America could boost its global hemp CBD sales. Cronos also expects its Israel operations to generate revenue growth beginning later this year. 

On top of all of this, Cronos' work with Ginkgo Bioworks could enable the company to be more competitive on a cost basis in the cannabis derivatives market and become a leader in the rare cannabinoids market. Cronos is using Ginkgo's technology to produce high-quality cannabinoids using genetically engineered yeast.

Better marijuana stock

Both of these marijuana stocks could be winners over the long run. But I think that Aurora Cannabis faces the more significant challenges over the short term. In my view, Cronos gets the nod over Aurora right now because of its solid cash position.

However, I'm leery of recommending either Aurora or Cronos as a buy at this point. I'd prefer to see Aurora show that it won't have to resort to dilution-causing methods to raise cash and for Cronos to demonstrate a clear path to profitability before going with either stock.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.20 (-1.64%) $0.02
Cronos Group Stock Quote
Cronos Group
$2.86 (0.00%) $0.00
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$41.68 (-3.67%) $-1.59

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