Aurora Cannabis (ACB -1.15%) and Canopy Growth (CGC 1.28%) are two of the top cannabis companies in Canada. But both businesses have struggled in recent years in growing their operations and staying out of the red.
In their most recent quarterly results, the two companies appeared to be moving in different directions. Aurora has been making significant progress in strengthening its bottom line while Canopy Growth remains nowhere near breakeven.
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Aurora looks to be on track to post a profit -- soon
Last month, Aurora reported its quarterly results through the end of December. The prevailing trend for the business is that it is getting leaner and cutting more costs in an effort to post a profit. In its second-quarter numbers, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss was 9 million Canadian dollars. That's a modest improvement from the CA$11.5 million loss it reported a period earlier. The company reaffirmed that it would be profitable by the first half of fiscal 2023. That means by this time next year, Aurora should be in black.
One of the reasons Aurora is hopeful about improving its prospects for profitability is that it is focusing more on its medical marijuana business, which enjoys higher margins than the recreational side. Of the CA$60.6 million in revenue it recorded in Q2, CA$45.7 million, or 75% of that, was from medical marijuana. A year ago, it was 57%.
Canopy Growth looks to be much further away
In its third-quarter results (which ended on Dec. 31), Canopy Growth's adjusted EBITDA loss of CA$67.4 million was only a CA$1 million improvement from a year ago. While the company noted that it reduced selling, general, and administration expenses, declining sales numbers and worsening gross margins offset many of those improvements.
On its earnings call, the company said it plans to focus on achieving profitability in Canada while also continuing to work on developing an ecosystem in the U.S. market. However, the company stopped short of offering any firm date as to when breakeven might happen, only that it continues to work toward that. CEO David Klein says the business has "a clear strategy that will deliver a path to profitability for Canada by focusing on areas where we have a right to win with premium brands backed by operational excellence and scale through unparalleled distribution."
Despite what management may say is happening, the numbers don't lie. The company's gross margin was a pitiful 7% in Q3, and even on an adjusted basis, was only 13%. This past quarter, its gross margin of CA$10 million was less than half of the CA$24.6 million Canopy Growth reported a year ago. Until it can improve on that (significantly), it'll be hard to see a clear path toward profitability for the business.
Is Aurora really the better buy?
In terms of valuation, Aurora is a cheaper stock than Canopy Growth, on a price-to-sales basis:
CGC PS Ratio data by YCharts.
Its business shows signs of improvement, even though revenue has been far from impressive; over the past four quarters, it has been within a fairly narrow range between CA$55 million and CA$61 million.
Canopy Growth is nowhere near profitability, and its top line has also been lackluster. Last quarter, net revenue of CA$141 million was down 8% year over year. While the business is positioning itself for an eventual move into the U.S. recreational pot market, it could be years before it opens up as legalization does not appear to be imminent.
Aurora does look like the better business today, although Canopy Growth may be better in the long run. But ultimately, cannabis investors will likely be focused on growth opportunities. Unfortunately, neither stock offers much of that today, which is why both have plummeted more than 60% in the past year. However, the cannabis sector as a whole hasn't fared well, with the Horizons Marijuana Life Sciences ETF also down by a similar percentage as investors have grown tired of waiting for progress on the legalization front in the U.S.
Unless you're willing to be incredibly patient and are OK with seeing significant losses in your portfolio, you may be better off avoiding these companies for now. A better move may be to go with a much safer growth stock instead.
