Canadian pot producers Aurora Cannabis (NASDAQ:ACB) and Canopy Growth (NASDAQ:CGC) have been rivals for years. Now, as the industry gets more crowded with competitors, the companies have to fine-tune their strategies in an effort to secure market share around the globe.
However, both companies are struggling to be the attractive growth investments they were before marijuana legalization took place in Canada in 2018. And while neither company did exceptionally well in their most recent quarterly results, I'll look at which one did better and is the better buy.
Which company is growing at a better rate?
A good place to start when comparing growth stocks is at the top line.
For the period ending Sept. 30, Canopy Growth reported revenue of 131.4 million Canadian dollars ($104 million). That was a 3.5% decline from the CA$136.2 million that it reported just a period earlier. The company noted "continued price compression" in the Canadian market and more competition in international markets as some of the reasons its revenue hasn't been particularly strong of late.
Aurora Cannabis generated less than half the revenue of its rival, posting net sales of CA$60.1 million for the same period. Although that was down 11% year over year, it was a 10% improvement from the previous three-month period (ending June 30), where net sales totaled CA$54.8 million. Aurora credits the improved numbers to focusing more on premium products, particularly those that it sells in the medical marijuana market. Its medical cannabis revenue of CA$41 million this past quarter was up 17% from the previous period.
Although Aurora's revenue was smaller, the company looks better on the top line because it increased quarter over quarter, and it had a solid segment (medical marijuana) that grew by double digits. Plus, with premium products showing strength, that also bodes well for long-term profitability.
Which company did better on the bottom line?
Profitability is always a sore spot for cannabis producers in Canada. As the industry has grown, that's going to put more downward pressure on prices and margins. Neither Aurora Cannabis nor Canopy Growth reported profits in their latest quarters, but the former was a lot closer than the latter.
This past period, Aurora reported a CA$12.1 million loss based on adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which shrank from the CA$19.7 million loss it incurred in the prior period. The company says it has a "clear path to profitability by the first half of fiscal 2023," which is about a year away since the company's most recent results were for the first quarter of fiscal 2022.
Canopy Growth, meanwhile, is not committing to a date for when it might achieve positive adjusted EBITDA, noting "Canada supply challenges and a delayed revenue ramp in the U.S." have thwarted its plans. The company previously said it expected to be operating in the U.S. market as early as next year. And with a lack of progress on U.S. marijuana legalization, it's safe to say it miscalculated on that projection. As a result, it's affecting its expectations for profitability.
The company's adjusted EBITDA loss of CA$162.6 million this past period was more than double the CA$63.6 million loss it posted three months earlier. However, it notes that without inventory write-downs, the adjusted EBITDA loss would have been more modest at just CA$76 million in its most recent quarterly results.
It's clear that Aurora Cannabis is on a better track and the more likely of the two companies to achieve adjusted EBITDA profitability within the next 12 months. Canopy Growth's focus on the U.S. market (in October, it announced plans for the acquisition of U.S.-based cannabis edible company Wana Brands) makes it likely that it won't turn a profit at least until legalization takes place in the U.S., when it can take advantage of having access to a much larger pot market.
Which stock is the better buy today?
This year has been a rough one for both of these pot stocks as Aurora is down 18% year to date, and that's the better return -- Canopy Growth's stock has fallen by more than 51%. The broader Horizons Marijuana Life Sciences ETF, meanwhile, has declined by just 5% over the same period. Investors are clearly bearish on these two stocks, and given their lackluster results, it's not a huge surprise as to why.
In their latest earnings reports, Aurora has been performing much better than Canopy Growth. Its top and bottom lines are showing signs of improvement, whereas Canopy Growth might continue to struggle until the U.S. market opens up. Trading at a multiple of less than seven times its revenue, Aurora is also the cheaper buy as investors are paying more than 10 times revenue for Canopy Growth.
Unless you're betting on marijuana legalization in the U.S. happening soon (or are willing to wait until that happens), Aurora Cannabis might be the better buy right now.