Cannabis stocks remain popular with investors for good reason. The marijuana industry is still in a nascent stage, which makes it attractive for growth investors. However, while pot producers in the U.S. are on the cusp of profitability, their peers north of the border are struggling with a slew of structural issues.
The rollout of licenses for retail outlets in major Canadian provinces has been slower than expected, which has impacted demand. This in turn has hurt top-line growth and profit margins due to massive inventory write-downs. A thriving black market and a rise in competition have not helped either. Alternatively, the prospect of marijuana legalization in the U.S. at the federal level suggests potential access to a larger market for Canadian cannabis producers, which would afford them improved both revenue and profits at a fast clip.
Here, we take a look at two Canadian stocks, Aurora Cannabis (ACB) and Tilray (TLRY), that have significantly underperformed the broader markets in the last two years to see which is a better contrarian bet today.
Click here to check out our new Cannabis Industry Report for 2021
Aurora Cannabis continues to disappoint
Last week, Aurora Cannabis announced its results for its fiscal third quarter of 2021, ending March 31. Aurora Cannabis’ sales declined 19.5% year over year to CAD55.2 million ($45.67 million). Its sales were down 17% on a sequential basis also. The company’s cannabis sales also fell 20.8% year over year after accounting for provisions and returns.
Aurora Cannabis explained the decline in sales as due to a shift in its product mix. The cannabis giant confirmed that it is looking to focus on the higher-margin medical marijuana business. Further, its decline also indicates the company has lost market share in Canada’s recreational marijuana segment.
In Q3, ACB’s adjusted EBITDA loss stood at CAD24 million ($19.85 million), which was lower than its prior-year loss of CAD49.6 million ($41.03 million). However, ACB stock has now lost more than 10% in market value. Wall Street forecasts the company to report sales of CAD68.8 million ($56.92 million), while its EBITDA loss was estimated at CAD10 million ($8.27 million) in Q3.
Aurora Cannabis investors have also been spooked by the company’s intention to file a prospectus that will allow it to raise CAD300 million ($248.18 million) via an ATM equity offering. Aurora Cannabis has diluted shareholder wealth at an exceptional rate in the past. In fact, its total outstanding shares had risen to 198 million at the end of March compared to just over one million back in June 2014.
Aurora Cannabis ended Q3 with CAD520 million ($430.18 million) in cash. The company said it will use the proceeds from its capital raised to fund accretive acquisitions and allow it to expand operations in the U.S.
ACB’s management had initially forecast to achieve positive EBITDA in Q1 of its fiscal year 2021. However, it continues to burn cash at an alarming rate while losing market share and shutting down operations at multiple facilities. ACB stock is now trading at $7.40 which is 90% below its all-time high.
Tilray completes merger with Aphria
Earlier this month, Tilray and Aphria formally completed their previously announced merger. The combined entity has generated $874 million in sales in 2020, which is 70% higher versus its last 12-month revenue of CAD506 million ($418.60 million) for Canada’s industry leader Canopy Growth.
Tilray expects that the merger will allow it to generate CAD100 million ($82.73 million) in pre-tax savings each year within the next 18 months. Investors will thus need to wait for more than a year for the company to operate at an optimal level and benefit from economies of scale.
Tilray’s CEO Irwin Simon has prioritized business integration and the acceleration of its global strategy to drive revenue and profit margins in the coming quarters. In 2020, Tilray’s international medical marijuana sales accounted for 16% of gross revenue at CAD41.10 million ($34 million). Comparatively, Aphria derives a major portion of its sales from international markets via its German-based subsidiary CC Pharma. In the last two quarters, Aphria’s distribution sales derived primarily from CC Pharma stood at CAD216.38 million ($179 million), which was 57% of total revenue.
The Cannabis 2.0, or derivatives segment, will also be a major driver for Tilray in 2021 and beyond. Last year, Aphria acquired U.S.-based SweetWater Brewing Company allowing it to enter the cannabis-infused beverage market once marijuana is legalized in the country.
The final verdict
Both Aurora Cannabis and Tilray are grappling with massive losses. However, the merger with Aphria should provide Tilray an opportunity to optimize its supply chain and benefit from cost synergies over time. The merger has created the largest cannabis company in the world, making it a stock to watch. In comparison, , Aurora Cannabis stock appears to be a shadow of its past self, given its ongoing dilutions and falling market share.
Click here to check out our new Cannabis Industry Report for 2021
ACB shares were trading at $7.17 per share on Wednesday morning, down $0.21 (-2.85%). Year-to-date, ACB has declined -13.72%, versus a 9.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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