Tilray or Aurora Cannabis – The Motley Fool

Sales of major marijuana growers skyrocketed after the opening of the Canadian marijuana market for recreation last October. Billions of dollars should be transferred from the black market to authorized retailers in the next few years. So we are still only at the very beginning of this industry. Investors can buy a lot of marijuana stocks, but some companies may be a better investment than others. For example, Tilray (NASDAQ: TLRY) and Aurora Cannabis (NYSE: ACB) are two of the biggest market – cap pot stocks, but I think only one of them deserves to be considered at the present time.

Billions of dollars at stake

The first weeks of recreational sales in the last quarter were paralyzed by supply shortages. As a result, many marijuana users have avoided licensed retailers. Nonetheless, Canada reported that recreational sales still exceeded Can $ 150 million in the last quarter, which was roughly equivalent to medical marijuana sales, even though the medical marijuana market was operational. since 2014.

Shortages are expected to be a temporary barrier to legal adult use sales in Canada as cannabis companies aggressively invest in increasing yields from existing facilities through expansion plans and automation. . In addition, recreational sales could accelerate later this year if Canadian regulators approved cannabis-based consumer products, including beverages and edible products.

Enjoying cannabis

Tilray and Aurora Cannabis are among the most widely held marijuana stocks. Although each of these companies already benefits from the Canadian leisure market, it is Aurora Cannabis that holds the most market share.

Net sales of Aurora Cannabis after elimination of excise taxes amounted to C $ 54 million for the quarter ended December 31, as compared to $ 11.7 million. in the same quarter of 2017. Its leisure sales amounted to 21.6 million, or a national market share. about 14%.

Tilray sales increased 204% year-over-year to C $ 20.9 million in the fourth quarter of 2018. Tilray has not disclosed the volume of its sales in the leisure market. However, sales reached C $ 12.9 million in the third quarter, before the start of leisure sales. If we assume that every dollar of its increase from one quarter to the next comes from the leisure market, its market share would be about 5%.

Rise of production

The advantage of Aurora Cannabis sales stems from an aggressive mergers and acquisitions strategy. The company's acquisition of CanniMed and MedReleaf has boosted its shares in 2018, but these transactions have provided an infrastructure, including production capacity, allowing Aurora Cannabis to make the most of the market. Recreation.

Aurora Cannabis produced 7,822 kg of cannabis in the fourth quarter, up 57% from the previous quarter, but this is only the beginning of planned production management. Greenhouse expansion projects increased its annualized production capacity to 120,000 kilograms in February, and the annualized capacity is now expected to be in the order of 150,000 kilograms, according to management's comments last month. Over time, the goal of Aurora Cannabis is to have a production capacity of over 500,000 pounds.

Unlike Aurora Cannabis, Tilray has been reluctant to invest in production capacity, preferring to buy marijuana wholesale, so its production is much smaller. In total, Tilray has only harvested about 11,000 kilograms in 2018. Since it is struggling to align its wholesale offering, it is taking steps to increase its own capacity. Nevertheless, Tilray targets an annual production capacity of only 90,000 kilograms.

How they pile on profitability

Marijuana stocks are not yet profitable because they reinvest a lot of money in their businesses to compete for their market share. Aurora Cannabis and Tilray are no exception. While waiting to analyze the net profits, it is worth considering the gross margin, excluding changes in fair value of inventories, and operating expenses.

In the fourth quarter, the gross margin of Aurora Cannabis was 52% and that of Tilray 20%. Tilray's lower gross margin is due in large part to the fact that it was necessary to spend more to buy wholesale marijuana for its products.

Operating expenses outpaced revenues, causing both companies to report significant net losses in the last quarter. The operating expenses of Tilray accounted for 124% of sales, while Aurora Cannabis accounted for 207% of sales. Aurora's net loss was C $ 238 million, while Tilray's net loss was C $ 41 million at current exchange rates.

Operating expenses are not the only ones that add to the margin. Pricing is also a problem.

Recreational market prices are lower than medical marijuana prices, and retail prices for cannabis extracts, such as oils, are higher than those of dried flowers. As a result, margins are also affected by the combination of channels and products.

In the fourth quarter, excerpts accounted for 54% of Tilray 's business figure and only 22% of Aurora Cannabis' s business figure. Tilray also drew proportionately more from her total medical marijuana revenues than Aurora Cannabis. As I mentioned, Tilray did not sell recreational sales, but if we assume that marijuana revenues for medical purposes are about stable compared to the third quarter, they then accounted for about 62% of revenues. This accounted for about 48% of sales of Aurora Cannabis.

Is any of these companies cheaper?

Marijuana mania has pushed most marijuana stocks up and, as a result, these companies will not be confused with valuable stocks. That said, Aurora Cannabis is less expensive than Tilray according to traditional evaluation parameters. In fact, although Aurora Cannabis's fourth quarter sales were 158% higher than Tilray's, Aurora Cannabis's market capitalization is only 41% higher than Tilray's. .

As a result, Tilray's 12-month sales stand at 137, Aurora's at 69, and its price-to-book ratio is 32, while Aurora is only 2, 9.

Given the disparity in valuations, the growth potential of Aurora Cannabis's sales, the increase in its margin due to the growth of its internal production and its much larger market share, I think this is the best of both marijuana stocks to buy now.