When it comes to Canadian cannabis companies, Aurora Cannabis (ACB 0.82%) has long had an upper hand. Aurora was already thriving with its medical cannabis business when it began to draw even more attention after the recreational market opened in Canada in 2018. A few major mistakes and external headwinds pulled Aurora to the ground last year, but its recent momentum has brought it back to the spotlight again.
Meanwhile, Cronos Group (CRON 3.90%) has been strengthening its balance sheet, and it has put itself in a safe position in the ongoing crisis. So let's shed some light on where you should place your bet.
Should you take the risk and believe in Aurora Cannabis again?
Canada legalized recreational cannabis -- mainly flowers, oils, plants, and seeds -- as part of "Cannabis 1.0" in October 2018. Aurora Cannabis ramped up production and went on an acquisition spree to capture the recreational market, burdening itself with debt in the process. This may have gone well for Aurora had cannabis revenues not been so affected by external factors last year.
However, 2020 seems to be shaping up as a lucky year for the company, beginning with its better-than-expected third-quarter results. Total net revenue (excluding provisions) grew 18%, to 78.4 million Canadian dollars, in Q3, but the company did mark another quarter of negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which reached CA$45.9 million.
Since May, Aurora has generated a lot of news: its reverse stock split, then its Q3 results, then assurance from management that it would hit profitability by the first quarter of fiscal 2021, the announcement of various cost-cutting measures, the acquisition of cannabidiol (CBD) company Reliva, and now the hiring of its chief commercial officer (CCO).
On July 6, Aurora announced the appointment of Miguel Martin, president of Aurora USA and head of Reliva, as CCO. This is a strategic move on Aurora's part to make use of Martin's experience in the consumer packaged goods industry now that Aurora has a presence in the U.S. market, with an eye toward expanding its "Cannabis 2.0" products, including edibles and beverages.
"Miguel has a proven track record of running profitable global sales and marketing teams in complex, highly regulated industries that are adjacent to cannabis," management said in a press release. "His new role at Aurora is indicative of our commitment to combining sales and marketing excellence with driving profitability in our core businesses."
Up until now, Aurora's leadership team hasn't given investors much reason for confidence. And for me, this seems like deja vu. Aurora is trying to recover, but it appears to be repeating its earlier mistakes of going too far, too fast. But the company cannot afford to slow down, with tough competition like Canopy Growth also ramping up the launch of Cannabis 2.0 products.
Even OrganiGram and Aphria have caught up with -- or may be in a better position than -- Aurora right now.
Would you play it safe with Cronos?
Cronos hasn't seen much big growth in revenue or pulled off positive profitability yet. But it has started off its fiscal first quarter on a strong note despite the ongoing crisis, with 180% year-over-year growth to CA$8.4 million. The new cannabis derivatives products -- in Cronos' case, mostly its vaporizers under the Cove and Spinach brands -- have been the revenue growth driver. Its U.S. hemp-derived CBD business acquisition, Redwood, has also proved favorable.
None of the Canadian companies but Aphria have been successful in achieving positive EBITDA yet. Cronos also reported operating losses in the first quarter, with the amount reaching CA$45.1 million. But the case for Cronos lies in the fact that it has a strong balance sheet, which is the most essential thing right now for cannabis companies, many of which are running out of cash. Cronos ended Q1 with CA$1.3 billion in cash and short-term investments, and management is focused on using that cash efficiently on research and development, which will bear fruit in the long term.
Adding to the argument for Cronos are its innovative Cannabis 2.0 products. Its work in producing cannabinoids through biosynthesis, once commercialized, with its partner Ginkgo Bioworks could create a boom in the industry.
Giving Cronos competition in the Israeli cannabis market is HEXO (HEXO), which recently entered Israel with its medical cannabis products. We will see how that works out, but for now, Cronos is working on rolling out its Peace Naturals-branded products and capturing the demand in the Israeli medical market.
So what's the verdict?
Though Aurora is taking all the right steps now, my gut feeling is not to trust the company as of now. Management made promises and missed their revenue and profit guidance many times last year, so I would wait to see some actual results. On the other hand, Cronos feels like a safe bet, especially because of its partnership with tobacco giant Altria (MO 2.45%), which gives it more room to expand in the U.S. Aurora still hasn't grasped any opportunity to tie itself up with any of the big names in the U.S. consumer market.
All that said, with an election coming in the U.S. and the topic of legalization heating up, the scope for the marijuana sector is broader than ever -- all it will require is patience.