Aurora Cannabis and Canopy Growth: A Valuation Update

In August, Aurora Cannabis (ACB) and Canopy Growth (CGC) (WEED) fell 10.9% and 27.3%, respectively.

Stock performance

On August 6, Aurora’s management provided better-than-expected guidance. Also, the company completed its acquisition of Hempco Food and Fiber on August 19. Despite these announcements, Aurora stock fell due to the weakness in the cannabis sector. The regulatory issues involving CannTrust Holdings and Curaleaf have dented investor sentiments, leading to a fall in cannabis companies’ stock prices.

On August 14, Canopy Growth reported weak earnings results for the first quarter of fiscal 2020. The company missed analysts’ revenue expectations by a wide margin, while its net losses were higher than analysts’ expectations. Its weak first-quarter performance appears to have brought its stock down. Last month, the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) fell 14.5% and 12.3%, respectively. However, the S&P 500 Index fell only 1.8% during the same period.

Aurora Cannabis and Canopy Growth: A Valuation Update

Forward EV-to-sales multiple

On August 30, Aurora Cannabis was trading at a forward EV-to-sales (enterprise value-to-sales) multiple of 7.79x compared to 12.06x at the beginning of August. The decline in Aurora’s stock price has lowered its valuation multiple. Despite the fall, Aurora continues to trade at a higher valuation multiple than its peers’ median value of 4.06x. However, it’s trading at a lower valuation multiple than its multiple of 12.95x for the last eight months.

The fall in Canopy’s stock price has also lowered its valuation multiple. On August 30, the company was trading at a forward EV-to-sales multiple of 7.32x compared to 9.15x at the beginning of August. The company is trading at a lower forward EV-to-sales multiple than its average valuation multiple for the last eight months of 12.95x. Analysts expect Aurora’s revenue to rise 225.4% in the next four quarters, while they expect Canopy’s revenue to rise 290.9%.

Aurora Cannabis and Canopy Growth: A Valuation Update

Forward EV-to-EBITDA multiples of Aurora and WEED

Analysts expect Aurora to report an EBITDA of 141.32 million Canadian dollars in fiscal 2020. On August 30, the company’s EV stood at 53.76x analysts’ EBITDA estimate for fiscal 2020. The company’s historical average EV-to-EBITDA multiple was 34.5x.

Analysts expect Canopy’s EBITDA to be negative for the next four quarters. We expect the company’s increased investments in its growth initiatives to increase its operating losses. On August 30, the company was trading at a forward EV-to-EBITDA multiple of -429.7x compared to its historical average of 71.9x. The median forward EV-to-EBITDA value of 12 Canadian cannabis companies stood at 10.9x, and the historical average stood at 32.0x.