Better Marijuana Buy: Aurora Cannabis vs. Canopy

Marijuana stocks have been on fire so far in 2019, and investors are flocking to the space in hopes of capturing some huge investment gains. Among the top players in the budding cannabis industry, Aurora Cannabis (NYSE: ACB) has built a reputation for fast growth and rapid expansion in production capacity. Meanwhile, Canopy Growth (NYSE: CGC) is a favorite among many marijuana investors, with its collaboration with beer and spirits giant Constellation Brands (NYSE: STZ) lending Canopy both credibility in the broader consumer goods industry and capital to use to pursue its ambitious aspirations.

Many investors are intimidated by the marijuana industry, and it can be nerve-wracking to try to compare young, innovative companies seeking to stake their claim to an explosive growth market. Here, we'll look at Aurora and Canopy based on some common measures to see which one looks like a better marijuana stock buy for investors.

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Valuation and stock performance

Both Aurora and Canopy have done well to start of 2019, with the stocks seeing gains of 44% and 68%, respectively, year to date. Yet when you look back a full year, the picture gets more mixed. Canopy still has impressive gains, having climbed 93% since February 2018. But Aurora has lost ground over the same period, falling 18%.

Trying to assess Aurora and Canopy on valuation is tricky. Neither company is consistently profitable, and the way in which cannabis companies account for their business operations makes quarter-to-quarter net income and losses hard to compare in any event. Even revenue has some challenges, but it's the more reliable number for comparing marijuana stocks at this point. Aurora Cannabis has an enterprise value of about 18 times its projected revenue for the coming 12 months, compared with Canopy's valuation of 36 times forward revenue estimates. On a trailing basis, both companies have price-to-sales ratios of 100 or more, but Canopy remains considerably higher. That, combined with the underperformance from Aurora's stock lately, makes Aurora look like the more attractive candidate from a valuation standpoint.

Partnerships

One of the key factors determining the success of cannabis companies so far has been whether they've been able to negotiate deals with existing well-known companies in related areas. For Canopy Growth, the collaboration with Constellation has been important, with the beverage king's $4 billion investment in Canopy helping to give the marijuana producer the flexibility to make big strategic moves. Of course, the investment comes with a catch, because it gives Constellation the ability to take majority control of Canopy if it chooses. Nevertheless, with access to capital being a non-issue, Canopy hasn't hesitated to take steps to bolster its growth, and shareholders have been able to evaluate the potential dilution of Constellation's investment in one fell swoop.

By contrast, Aurora has largely decided to go it alone in the cannabis space. A rumored partnership with Coca-Cola didn't end up materializing, and it's not evident that any other partners are in the picture. That's had advantages for shareholders, in that they don't have to worry that a major partner would reap outsize benefits from a collaboration. However, it also forces Aurora to do its own work in raising capital, and that's resulted in considerable use of stock-based acquisitions that have had dilutive impacts of their own for shareholders. In terms of partnerships, Canopy has the clear edge.