The cannabis industry continues to boom with Canopy Growth Corporation (TSX:WEED) and Aurora Cannabis Inc., two behemoths in the cannabis space. As cannabis products continue to become a significant business, investors will want to know which company is expected to become the dominant market leader. Let’s look at the performances of these two cannabis companies over the past few quarters.
The cannabis industry has experienced a difficult period since mid-2019. Regardless, there is still much to believe in in this sector, especially for long-term investments in big opportunities like Canopy or Aurora cannabis stocks.
After all, it’s widely expected that legal cannabis will be the fastest growing industry in the world over the next decade.
With this in mind, Aurora Cannabis and Canopy Growth, two of the largest players in the sector, are fighting to become the industry’s leader.
Of these two stocks, which is the best long-term bet? This is what we will try to determine in this analysis.
The details on Aurora Cannabis stocks
Aurora (NYSE: ACB) has been one of the favorite stocks of retail investors.
They’ve been on the top of interest lists for those who are eager to invest in marijuana stocks, ever since it debuted on the New York Stock Exchange last year.
The popularity of this cannabis giant can be explained in five key points:
- With an estimated production capacity of nearly 700,000 kilograms per year, Aurora is by far one of the largest cannabis growers in the world. Aurora’s massive scale allows it to generate a first-class gross margin (58% in the last quarter), a modest cost of production, and leading market shares in the medical and recreational cannabis fields in Canada.
- Until now, Aurora’s 17 acquisitions have created significant operating synergies across its various businesses. In theory, the full integration of these units should further lower production costs, giving Aurora a major competitive advantage over the entire sector.
- Aurora has established a presence in 25 countries to date. Its largest acquisition, Pedanios, renamed Aurora Deutschland, allowed it to set foot in Germany, a country with a population of over 83 million and health insurance policies adapted to cannabis.
- Aurora has developed a flourishing medical cannabis business, with more than 84,000 patients treated with its products during the last quarter. This is an encouraging development, given that medical cannabis is likely to be much less vulnerable to margin compression than recreational products.
- Unlike Canopy Growth and Cronos Group, Aurora has not yet integrated a major investor-partner, which has allowed the company to retain control of its destiny. The same cannot be said of its biggest competitors.
Aurora’s business model
In summary, Aurora’s highly diversified business model should enable it to capture a large part of the global cannabis market. This is a market that could be worth up to $200 billion by the end of the next decade.
This is a huge business opportunity for a company with a current market capitalization of $4.17 billion. The bad news is that Aurora cannabis stocks, like almost all of its Canadian counterparts, is currently facing significant headwinds in the short term.
The slower than expected deployment of retail licenses for physical stores, as well as the one-year delay in legalizing cannabis products such as edible products, have supported the black market in Canada, creating a revenue gap for legal cannabis companies.
The direct consequence is that Aurora may remain unprofitable for perhaps another full fiscal year. Aurora, therefore, may have to raise a significant amount of capital over the next two quarters.
This means a greater dilution of the shareholder base, which is mechanically unfavorable during the course of its shares, although the company’s capacity should not be underestimated.
Now let’s look at Canopy Growth cannabis stocks
Canopy Growth (TSX: WEED), listed on the Toronto Stock Exchange in Canada, is another giant in the cannabis sector alongside Aurora cannabis stocks.
Here’s why this also looks like an interesting investment:
- Canopy’s partnership with beverage giant Constellation Brands has made it one of the most financially sound marijuana companies in the world. At last count, Canopy held $3.4 billion in cash and cash equivalents, although much of this war chest is currently reserved for the potential acquisition of the huge U.S. distributor Acreage Holdings.
- Canopy’s association with Constellation is expected to produce some of the most attractive cannabis products in the industry. Constellation has a well-deserved reputation for developing leading alcoholic beverage brands, and there is no reason why this expertise cannot be applied to cannabis-based beverages.
- Canopy’s acquisition of Acreage Holdings gives it a clear competitive advantage over key competitors such as Aurora when it comes to entering the American market, once the federal government legalizes cannabis.
Canopy’s gross margin
The two main points to remember are that Canopy is well-positioned to become a formidable force in the cannabis products market and that it has a good chance of also beating Aurora in the United States.
On the other hand, several black marks can be seen. Canopy’s gross margin has always been among the worst in the industry, and there is considerable uncertainty about how the new CEO will run the company in the coming years.
In addition, Canopy’s upside potential could potentially be affected by its close association with Constellation. In other words, Constellation could choose to devour the rest of Canopy long before the global cannabis market really gets going.
Other North American cannabis stock investment opportunities
Aside from these cannabis companies, one US-based company experienced impressive growth in the last period.
Veritas Farms Inc. (OTC: VFRM), an increasingly successful producer and distributor of CBD products, demonstrates the potential of the cannabis market.
The company focuses on transparency and on offering high-quality CBD products, maintaining control over the whole supply chain.
Thanks to the transparent approach to its products, Veritas just closed a groundbreaking partnership with Winn-Dixie and BI-LO supermarkets to supply CBD to 152 South Eastern stores.
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