Better Marijuana Stock to Buy: Tilray or Aurora Cannabis

Sales at top marijuana producers are soaring following the opening of Canada's recreational marijuana market last October. Billions of dollars are expected to shift from the black market to licensed retailers over the coming years, so we're still only in the early innings for this industry. There are lots of marijuana stocks investors can buy, but some companies may be a better investment than others. For instance, Tilray (NASDAQ: TLRY) and Aurora Cannabis (NYSE: ACB) are two of the largest pot stocks by market cap, but I think only one of them is worthy of consideration right now.

Billions of dollars at stake

The first weeks of recreational sales last quarter were hamstrung by supply shortages. As a result, many marijuana consumers avoided licensed retailers. Nevertheless, Canada reported that recreational sales still topped $150 million Canadian last quarter, which just about matched legal medical marijuana sales even though the medical marijuana market had been up and running since 2014.

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The shortages should be a temporary headwind to legal adult-use sales in Canada, because cannabis companies are investing furiously to boost yields at their existing facilities with expansion projects and automation. Furthermore, recreational sales could accelerate later this year if Canadian regulators sign off on cannabis-derived consumer products, including beverages and edibles.

Cashing in on cannabis

Tilray and Aurora Cannabis are among the most widely owned marijuana stocks. Although each of these companies is already benefiting from Canada's recreational market, it's Aurora Cannabis that's captured the most market share.

Aurora Cannabis' net revenue after backing out excise taxes totaled CA$54 million in the quarter ending Dec. 31, up from CA$11.7 million in the same quarter of 2017. Its recreational sales were CA$21.6 million, which works out to a nationwide market share of about 14%.

Tilray's sales grew 204% year over year to CA$20.9 million in Q4 2018. Tilray didn't break out how much it generated in the recreational market. However, its sales were CA$12.9 million in Q3, before recreational sales began. If we assume every dollar of its quarter-over-quarter increase was from the recreational market, then its market share would be about 5%.

Pumping up production

Aurora Cannabis' sales advantage stems from an aggressive M&A strategy. The company's acquisition of CanniMed and MedReleaf caused its shares outstanding to soar in 2018, but those deals provided infrastructure, including production capacity, that's allowing Aurora Cannabis to make the most of the recreational market opportunity now.

Aurora Cannabis produced 7,822 kilos of cannabis in Q4, up 57% from the previous quarter, but that's only the beginning of the production management's got planned. Greenhouse expansion projects increased its annualized production capacity to 120,000 kilograms in February, and annualized capacity should be tracking at about 150,000 kilos now, based on management's comments last month. Over time, Aurora Cannabis goal is to have over 500,000 kilos of production capacity.

Unlike Aurora Cannabis, Tilray's been hesitant to invest in production capacity, instead choosing to buy marijuana wholesale, so its production is much smaller. Altogether, Tilray harvested only about 11,000 kilos in 2018. Since it's struggling to line up wholesale supply, it's taking steps to increase its own capacity, but even still, Tilray is targeting annual production capacity of just 90,000 kilos.