Aurora Cannabis (ACB) and Aphria (APHA) are down 17.14% and 5.27%, respectively, YTD (year-to-date). These performances are mostly in line with the overall downtrend in the cannabis sector. Sector ETFs such as the ETFMG Alternative Harvest ETF (MJ) and the Cambria Cannabis ETF (TOKE) are trading 53.96% and 30.79% lower than their respective 52-week highs. But which of these two stocks makes the most investment sense in these dire circumstances?
Let’s do a brief overview of the current state of the cannabis sector. Then we’ll analyze the share price movements and valuation multiples of Aurora Cannabis and Aphria.
Cannabis sector update
Cannabis stocks have undoubtedly become one of the most controversial investments of 2019. The phenomenal returns of 2018 continue to lure investors to these stocks. However, the market’s risk profile has taken a turn for the worse this year. Increasing tensions between the US and China have taken their toll on all companies, including cannabis companies. Increasing consumer and regulatory concerns about vaping are also putting pressure on the overall investor sentiment.
Finally, analysts are no longer satisfied with the revenue growths of these companies. Instead, they’ve started questioning the profitabilities of these much-hyped cannabis players.
Banks have also started placing restrictions on the trading of cannabis stocks. This development may have a detrimental impact on the fundraising capacities and subsequent expansion plans of these cannabis companies.
There have been few positive developments for the sector. Prominent among them is the passage of the SAFE Banking Act of 2019 and favorable results reported by the CATO institute. To learn more about the SAFE Banking Act, read Marijuana Legalization: House Passes SAFE Act in the US.
Aurora’s and Aphria’s performances
On October 7, Aurora Cannabis closed at $4.11. The stock has fallen 6.38% and 32.40% in the last week and last month, respectively. The stock is trading at a 67.19% discount to its 52-week high of $12.52. Investors and analysts were disappointed with the company’s fourth-quarter results. This disappointment led to multiple downward revisions from prominent research analysts covering the company. To know more about Aurora Cannabis’s fourth-quarter earnings results, read Aurora Cannabis: Are Its Q4 Results Good or Bad News?
On October 7, Aphria closed at $5.39. The stock has risen 3.85% in the last week but fallen 23.65% in the last month. The stock is trading at a 66.71% discount to its 52-week high of $16.19. Aphria has been one of the few cannabis companies to beat consensus estimates in its latest earnings results. This performance helped boost the overall analyst and investor sentiment for the company.
Forward EV-to-sales multiples
As of October 7, Aurora Cannabis was trading at a forward EV-to-sales (enterprise value-to-sales) multiple of 6.17x compared to 7.94x at the beginning of January. The company’s valuation multiple has crashed from its high of 25.24x in September 2018. Its stock price has suffered amid the larger sector sell-off. The company’s weaker-than-expected fourth-quarter revenue performance and MKM Partners’ “sell” rating have also pressured its stock. Despite these hurdles, there might be hope on the horizon. On October 3, the company provided an update on its ongoing growth operations and growth initiatives.
Aphria’s forward EV-to-sales multiple also declined from 2.88x on January 2 to 1.83x on October 7. The declines in Aphria’s share price and valuation multiples mostly reflect sector-wide concerns. The company, however, is being increasingly recommended by analysts as an attractive investment opportunity. It’s also focusing on leveraging the upcoming Cannabis 2.0 opportunity.
Aurora Cannabis continues to trade at a premium compared to the median multiple of the cannabis sector. Aphria, however, is trading at a significant discount to the median. The median was calculated based on the multiples of 12 Canadian cannabis companies: Canopy Growth, Tilray, Aphria, Aurora Cannabis, KushCo Holdings, Cronos Group, Green Thumb Industries, Innovative Industrial Properties, HEXO, Supreme Cannabis Company, CannTrust Holdings, and OrganiGram Holdings.
Aurora’s and Aphria’s forward EV-to-EBITDA multiples
On October 7, Aurora Cannabis was trading at a forward EV-to-EBITDA multiple of 30.98x compared to 97.97x at the beginning of September. The company’s valuation multiple has fallen due to the combined impact of its lower share price and its increased EBITDA estimates. Analysts expect the company’s fiscal 2020 EBITDA to be -35.39 million Canadian dollars.
Aphria was trading at a forward EV-to-EBITDA multiple of 10.02x on October 7. This multiple was close to its valuation multiple of 10.00x on January 2. The company’s share price has remained mostly stable since the beginning of 2019. Analysts expect its fiscal 2020 EBITDA to be 64.73 million Canadian dollars.
Both Aurora Cannabis and Aphria are currently trading at premiums to the median multiple of the cannabis sector.
The cannabis sector is currently demonstrating a significant level of volatility. Amid this backdrop, it’s essential for investors to keep a close eye on the developments in the space. For more cannabis-related news and updates, be sure to check out 420Investor Daily.