Here is 1 area where Aurora Cannabis absolutely beats canopy growth
Cannabis Aurora (NYSE: ACB) is a shadow of his old self. The cannabis producer has scaled back its global operations. It is no longer the leader in the Canadian adult recreational cannabis market, and its hopes of finding a major partner outside of the cannabis industry have collapsed.
For most of the past five years, Aurora has ranked behind only Canopy growth (NASDAQ: CGC) among Canadian cannabis producers by market capitalization. The company has now fallen to fifth place, with its share price falling more than 90% in the past 12 months. Meanwhile, Canopy stays at the top. But there is at least one area where Aurora Cannabis outperforms Canopy Growth.
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No competition
Due to its stock bombardment since March 2019, Aurora’s valuation looks more attractive than Canopy’s valuation.
Neither company is profitable yet, so we cannot use profit-based valuation metrics. But we can compare the multiple price / sales (P / S) of the two marijuana stocks. Aurora shares are currently trading at around 2.4 times sales. This is only a fraction of Canopy’s P / S multiple of 16.
During the last quarter, Aurora generated total net revenue which was almost two-thirds of Canopy’s net revenue level. However, Aurora’s market cap is just over a tenth the size of Canopy’s market cap. This represents a major disconnect between the valuations of the two companies.
Aurora is also much closer to generating positive earnings before interest, taxes, depreciation and amortization (EBITDA) that Canopy is. This gives it a more attractive valuation using the Enterprise Value / EBITDA metric. Aurora’s EV / EBITDA multiple is negative at 0.27 compared to Canopy’s EV / EBITDA of minus 3.22.
Cheap for a reason
Either way, Aurora Cannabis is a much cheaper stock than Canopy Growth. Unfortunately, Aurora is cheap for a reason – or rather, several reasons.
Aurora continues to post huge losses each quarter. The company’s write-off of C $ 1.8 billion of goodwill impairment charges in the fourth quarter did not reassure investors in the slightest. Even without this major impairment charge, Aurora would still have lost money in its fourth quarter of fiscal 2020 ended June 30, 2020.
Maybe the the most worrying thing about Aurora’s fourth quarter results, however, was that the company expects its sales to decline in the next quarter. The lower portion of Aurora’s net revenue forecast for the first quarter of fiscal 2021 reflects a double-digit percentage decline from the prior quarter.
Aurora’s loans amount to C $ 200 million, with another C $ 327 million in convertible debentures. As of June 30, the cannabis producer’s cash reserves totaled just over C $ 162 million. Aurora’s financial situation and expectations of declining revenues will not give any investor warm and fuzzy feelings about the future of the business.
An advantage that Aurora would gladly lose
Aurora needs a dramatic improvement in her financial performance to make a difference. A good start would be for Aurora to generate positive Adjusted EBITDA. The company now plans to meet that target by the second quarter of fiscal 2021, a quarter later than its previous projection.
Another imperative is for Aurora to return to strong revenue growth. New CEO Miguel Martin has said he plans to “reposition” Aurora in the Canadian recreational cannabis market. Perhaps his efforts will bear fruit.
In the meantime, Aurora Cannabis appears to continue to overtake Canopy Growth in the valuation arena. But it’s an advantage the company would be more than happy to lose.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
