The stocks of Canadian cannabis companies Canopy Growth (CGC 15.03%) and Aurora Cannabis (ACB 18.15%) skyrocketed after the legalization of recreational marijuana in Canada in 2019. Investors poured money into the shares based on the potential of the cannabis industry. However, during the past two years these once-popular hot stocks have been on a downward spiral as they've struggled to achieve profitability.
Though the drug is legal in Canada, slow-to-change regulations and a smaller market with increasing competition have hampered the growth of the Canadian cannabis companies. However, both companies are making every effort to recover, from cost-cutting to smart acquisitions. They have left no stone unturned to achieve positive earnings before interest, taxes, depreciation and amortization (EBITDA) as soon as possible. Let's see if the efforts will help both Aurora and Canopy to recover in 2023.
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Aurora Cannabis might not be doing enough
When demand was high in Canada, Aurora Cannabis went on an acquisition spree that strained its balance sheet. However, intensifying headwinds, such as a demand-supply imbalance and pricing pressure, slowed its revenue growth, resulting in quarterly losses.
Despite numerous cost-cutting efforts, the company has been unable to achieve positive EBITDA. But it has managed to narrow its EBITDA losses. Adjusted EBITDA came in at $8.7 million Canadian dollars ($6.5 million) in the first quarter of fiscal 2023 (ended Sept. 30), down from CA$11 million the previous year.
The company reassured investors that it would achieve adjusted EBITDA profitability by Dec. 31, which would fall within the second quarter of the company's fiscal 2023. Aurora has previously failed numerous times to meet its EBITDA targets. It is hard to believe that it will be able to do so this year.
At the end of the quarter, the company had CA$398 million in cash and cash equivalents. It raised a majority of this money through stock offerings, which doesn't sit well with investors, who see the value of their holdings diluted. Equity issuance -- rather than raising capital through debt -- is frequently interpreted as a failure, which has taken a toll on its stock price.
Aurora purchased TerraFarma, the parent company of Thrive Cannabis, in May in an attempt to generate EBITDA from cost synergies through the acquisition. Cost synergies are savings realized as a result of a merger by increasing operating efficiency and eliminating overlapping functions.
Increased sales are influenced by factors such as high-quality manufacturing facilities, competitive innovative products, growth strategies, the size of operations, and others. However, this may take some time. It typically takes longer for a merger to reach its full potential. In the meantime, Aurora must continue to prioritize cutting costs to reduce its quarterly losses.
Canopy Growth is taking some bold steps to recover
It is disheartening to see Canopy Growth, which enjoyed a first-mover's advantage in Canada, now struggling to increase revenue. Revenue in the second quarter of fiscal 2023 ended Sept. 30, fell 10% year over year to CA$118 million. The company attributed the decline to increased competition in the Canadian recreational market, as well as the impact of the divestiture of its Canadian retail business.
Canopy recently completed the divestiture of its Canadian retail business, which it believes will allow it to focus on generating revenue growth in Canada. These cost-cutting strategies are helping the company narrow its losses. The quarter's adjusted EBITDA loss came in at CA$78 million, down from $85 million from the previous year.
To accelerate its entry into the U.S. market, Canopy has established Canopy USA, a new U.S.-domiciled holding company that will consolidate all of its U.S. investments such as Acreage, Jetty, and Wana Brands.
U.S. beverage giant Constellation Brands invested in Canopy in 2017, which ensures its financial security for the time being. It ended the quarter with $1.1 billion in cash and short-term investments.
Is there hope for both in 2023?
Though legalization in the U.S. appears to be a ray of hope for both companies, this may not be the case. Canopy, along with its partners, has a good opportunity to expand in the U.S. markets. But it is still questionable how big it could get considering the U.S. market has tough competition. Canopy has a chance to recover, but I doubt it will happen this year. Investors who own Canopy may have to wait a little longer.
Aurora, on the other hand, will struggle to expand in the U. S. in the absence of a strong partner. It has cash on hand now, so it won't run out of money, but it also can't make any drastic moves to expand. Even in the Canadian market, the company's future is uncertain. It could do well financially if it were acquired by a larger company, but I would advise investors to avoid this marijuana stock for the time being.
