Year to date, shares of the two largest companies in the cannabis sector, Canopy Growth (CGC -1.86%) and Aurora Cannabis (ACB -1.30%), have not been performing well. Issues with oversupply in Canada aside, the two companies are also contending with a devastating pandemic that shut down businesses due to government restrictions and wreaked havoc on the economy.
Since the beginning of the year, Canopy Growth stock has declined by more than 20%, while Aurora's stock has fallen by as much as 50%. With their valuations becoming cheaper and cheaper, however, investors are wondering which company is better to buy on the dip. Let's find out together.
Revenue and production capacity
In fiscal year 2020, Canopy Growth generated more than $399 million in net revenue, representing a growth of 76% compared with last year. The company had an adjusted gross margin of 42% in the fourth quarter of 2020. Moreover, Canopy Growth harvested more than 137,000 kilograms of cannabis during the same period, compared with 46,927 kilograms last year.
While the company's production capacity increased, the average selling prices for its products were also respectable. Canopy Growth's selling price ranges from $5.65 per gram for recreational cannabis to $48.04 per gram for international medical cannabis.
However, Aurora's products were much more constrained in terms of selling prices, ranging from CA$4.33 to CA$8.12 depending on selection. While the company was slightly more profitable with 54% adjusted gross margins, it only brought in CA$207 million in revenue nine months into fiscal year 2020. Aurora's 39% growth was about half of what Canopy achieved last year.
Also, the company's production capacity was lower, with 46,927 kilograms of dried cannabis harvested in the past nine months. Besides lower production capacity and revenue, Aurora Cannabis has another issue that makes it a less attractive buy.
Goodwill is the premium a buyer pays over an acquired company's book value. When the acquired company's business operations are materially impacted, such as by an event like COVID-19, its goodwill value must be written off, leading to huge net losses for the buyer.
During Aurora's acquisition spree, it gathered more than CA$2.415 billion in goodwill, which is more than half of its CA$4.718 billion in net assets. Unfortunately, a large portion of its shareholders' equity is supported by goodwill, making it vulnerable to write-offs.
Canopy Growth largely does not suffer from this problem. Even though the company's goodwill amounts to $1.954 billion, it has $6.857 billion in total assets and $4.886 billion in total shareholder's equity. Hence, Canopy Growth offers much more cushion for shareholders should it see negative effects on its business.
Currently, Canopy Growth has more than $1.88 billion in cash and short-term investments. Meanwhile, the company's major liabilities amount to $449 million in long-term debt and $322.5 million in dilutive warrants. When combined, Canopy Growth is in great financial health, as it has more than $1 billion in net cash left over to offset potential losses from operations.
Aurora, however, is not so fortunate. While the company has more than CA$230 million in cash and CA$11.8 million in short-term investments, it records CA$292.8 million in long-term convertible debt and CA$246.2 million in long-term loans and borrowings. Additionally, Aurora will be liable for more than CA$30 million in current convertible debt and CA$21 million in current borrowings. Combined, the company does not have enough cash to offset its debt and will need to raise further stock offerings that dilute shareholders to offset business losses.
A much better option for investors
Currently, Canopy Growth has a market capitalization of $5.9 billion compared to full-year sales of $399 million, yielding a price-to-sales ratio of 15. Meanwhile, Aurora has a market capitalization of $1.4 billion and is generating CA$275 million in revenues at an annual run rate, yielding a price-to-sales ratio of 7. While Aurora Cannabis may seem like the cheaper option, Canopy has much more financial stability and is thus a better buy.
Although the two companies' net losses for fiscal year 2020 are comparable at about $1.4 billion (annualized for Aurora), , Canopy has much more cash on its balance to survive shortfalls. When it comes to net loss and overall metrics, Canopy Growth has the upper hand. Hence, I think investors would see their portfolios perform much better should they choose Canopy Growth over Aurora for the time being.