After a disastrous 2019, Aurora Cannabis(NYSE: ACB) rises from the ashes in 2020. In a news series this year, Aurora has surprised investors with the efforts it is making to recover. Management is focused on achieving positive profitability, and all eyes are now on this business.
Meanwhile,Canopy growth(NYSE: CGC) does not neglect its efforts to reduce costs and profitability. It could see exciting growth in its new cannabis derivatives, which have already received positive reviews from customers. Cannabis derivatives are part of the October “cannabis 2.0” legalization in Canada, which legalized other recreational products (think cannabis-infused edibles, drinks, chocolates, vapers, and concentrates). “Cannabis 1.0” in 2018 made cannabis flowers, oils, plants and seeds legal in Canada.
Both companies are working hard to recover from difficult years in 2019. Is either or both likely to be successful this year?
Aurora Cannabis is all-in
The unrest of the past year caused Aurora’s shares to fall so far that its shares were on the verge of delisting from the New York Stock Exchange (NYSE). However, quick action using the only option available (dilution of the stock) saved the business. Shares must trade at more than $ 1 per share to be included on the NYSE; If a stock falls below this level during the duration of a 30-day trading period, it receives a warning notification allowing it to raise its share price.
Aurora surprised investors with its third quarter results in May, posting revenue up 16% year over year to C $ 75.5 million. That said, it also reported another quarter of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which reached C $ 45.9 million.
It is imperative now that Aurora becomes profitable. In the third quarter results, management assured investors that it will achieve positive EBITDA by the first quarter of fiscal 2021, which ends in September of this year. The company made many operational changes to reduce costs and reduce expenses in order to meet the target. Management expects that a downsizing and restructuring changes at the executive management level, as well as the closure of five of its small facilities over the next two quarters, will help it focus on productive efforts.
Canopy Growth has the upper hand
While Canopy Growth isn’t profitable either, its involvement in the cannabis drink category gives it an edge over Aurora. Canopy, with its partner Constellation marks, plans to launch innovative cannabis-infused drinks, which the company says will attract a whole new consumer base.
Recently, Canopy announced that it has received positive responses from consumers to its ready-to-drink THC-infused cannabis drinks, namely Tweed Houndstooth & Soda and Tweed Bakerstreet & Ginger, launched in March and April. It has also launched two other drinks, Houseplant Grapefruit and Deep Space, in the past two months. Canopy believes cannabis drinks could be a game-changer for the industry and is ready to take advantage of the market. During this time, Aurora never hinted at an interest in drinks.
The accounting and professional services association Deloitte noted that the Canadian cannabis drink market could generate nearly C $ 529 million per year. If these estimates turn out to be correct, Canopy might have the upper hand on the drinks, while Aurora Cannabis might not.
So far, Canopy has increased its revenue 15% year over year to C $ 107.9 million for its fourth quarter; this measure is up 76% for fiscal 2020. The Company’s EBITDA losses amounted to C $ 102 million for the quarter and C $ 442 million for the full year.
Canopy has also attempted several measures to cut costs under the leadership of CEO David Klein. The closure of operations in South Africa and Lesotho and the closure of some facilities in Canada, Colombia and New York will help the company operate with an asset-based approach.
Aurora has repeatedly failed to live up to expectations, so it’s still too early to know if he’s repeating his mistakes this year. Its fourth quarter results, due on September 25, should give us a better idea of whether any or all of its strategies are working.
Opportunities may continue this year in the Canadian cannabis market, with the opening of more legal stores in Ontario; the total number of authorized retail outlets in the province reached 100 last month. That said, actual store openings could take some time due to the regulatory process.
Both companies could benefit from these new locations, as they were both struggling last year in part due to the lack of legal stores. Demand and production have never been a problem for any of these players as they have each created a brand for their innovative products. But in Canada, fewer legal retail outlets than expected have boosted the black market, straining the earnings of producers like Aurora and Canopy.
Although revenues appear to be increasing this year, achieving positive EBITDA remains a task for these two. Overall, however, Canopy remains in a better financial position and has a better chance of making a profit, given the advancement of its cannabis derivatives this year.
In July, Aurora’s stock fell 16.9%, while Canopy and the Horizons Marijuana Life Sciences ETF gained 10.9% and 4.8% respectively. The market as monitored by the ETF SPDR S&P 500 is up 5.1% over the same period.
If you are interested in other marijuana stocks besides the popular players, there are at least three other cannabis stocks to consider for 2020. Between these two big names, however, Canopy Growth would be my choice.
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