Aurora Cannabis versus Canopy Growth: A Valuation Update

The cannabis sector has been under pressure since the beginning of September. The sector ETFs, the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) lost 13.0% and 14.6 of their stock values from August 30 to October 4, respectively. Cannabis companies’ stock prices fell due to concerns about vaping-related deaths and the subsequent ban on selling vaping devices in some US states.

However, there was some positive news for cannabis companies. On September 25, the House of Representatives passed the SAFE Banking Act of 2019. The bill would allow financial institutions to conduct business with cannabis companies. On October 2, the CATO Institute reported the results of its 2019 Welfare, Work, and Wealth Survey. The results indicated that most Americans favor decriminalizing cannabis-related offenses. The survey results led to an increase in cannabis companies’ stock prices.

We’ll compare Aurora Cannabis (ACB) and Canopy Growth’s (WEED) (CGC) valuation multiples.

As of October 4, Aurora Cannabis was trading at 5.84 Canadian dollars—a fall of 20.4% since August 30. The stock price fell due to lower-than-expected fourth-quarter revenues and analysts’ lower target prices. Recently, the company provided an update on its current operations and the progress on its upcoming facilities. The update increased investors’ confidence, which led to a rise in the company’s stock price.

During the same period, Canopy Growth lost 2.7% of its stock value. On September 27, Bank of America cut its rating for Canopy Growth to “neutral” from “buy.” The downgrade and weakness in the cannabis sector dragged the company’s stock price. On October 2, Canopy Growth acquired a 72% stake in BioSteel Sports Nutrition, which led to a rise in its stock price.

As of October 4, Aurora Cannabis was trading at a forward EV-to-sales multiple of 6.51x compared to 10.79x at the beginning of September. The company’s valuation fell due to its lower stock price and analysts’ higher revenue estimates for the next four quarters. Analysts increased their revenue expectations due to Aurora Cannabis’s growth initiatives and the second phase of legation in Canada. Currently, Aurora Cannabis has traded lower than its average forward PE ratio of 10.48x since the beginning of 2017.

During the same period, Canopy Growth’s forward EV-to-sales multiple fell from 7.47x to 7.27x. The decline in Canopy Growth’s stock price offset the impact of analysts’ lower revenue estimates for the next four quarters, which lowered its valuation multiple. Analysts cut their revenue estimates for the next four quarters from 1.18 billion Canadian dollars to 1.17 billion Canadian dollars. Analysts might have lowered their revenue estimates due to concerns about vaping-related deaths.

Despite the fall, Aurora Cannabis and Canopy Growth continued to trade above peers’ median value of 3.82x. To calculate the median value, we considered 12 Canadian cannabis companies mentioned in the footnote below.

As of October 4, Aurora Cannabis was trading at a forward EV-to-EBITDA multiple of 33.05x compared to 68.8x at the beginning of September. The company’s valuation multiple fell due to its lower stock price and analysts’ higher EBITDA estimates for the next four quarters. Analysts increased their EBITDA estimates from 110.43 Canadian dollars to 191.9 Canadian dollars. As a result, Aurora Cannabis has traded lower than its average valuation multiple of 34.51x since the beginning of 2017.

During the same period, analysts lowered their EBITDA estimates for Canopy Growth to a loss of 64.68 million Canadian dollars compared to a loss of 58.28 million Canadian dollars at the beginning of last month. Canopy Growth is focusing on the second phase of the legalization and expanding its CBD business in the US to drive its business. The expenses incurred due to the initiatives might have prompted analysts to lower their EBITDA. The lower EBITDA impacted the company’s EV-to-EBITDA multiple. As of October 4, Canopy Growth was trading at an EV-to-EBITDA multiple of -131.8x, which was significantly lower than its average of 71.93x since the beginning of 2017.

In the above graph, you can see that Aurora Cannabis is trading above peers’ median value of 7.97x. However, Canopy Growth is trading significantly lower.

So far, the cannabis sector has underperformed the broader equity market this year. However, more US states and countries across the world are warming up to cannabis. These developments and the second phase of legalization in Canada could drive the cannabis sector.

Please visit 420 Investor Daily for analysts’ ratings and target prices for cannabis stocks.