How Do ACB’s and WEED’s Valuation Multiples Compare?

Aurora Cannabis (ACB) and Canopy Growth (WEED)(CGC) are two prominent players in the cannabis sector. Before going to their valuations, let’s look at the stock performance of both companies. As of December 20, Aurora Cannabis has lost 56.5% of its stock value this year. The weak performance in the last two quarters, its management’s decision to scale back its expansion plans, and the increase in its debt appear to have led to a fall in the company’s stock price. Also, the weakness in the sector has contributed to the fall in the company’s stock.

During the same period, Canopy Growth’s stock has declined by 28.0%. Weak sales in the first two quarters of fiscal 2020 have led to a fall in its stock price. However, the company’s update on its upcoming Cannabis 2.0 products, the appointment of a new CEO, and Bank of America’s upgrade appear to have offset some of the declines.

For our analysis, we have considered EV/sales and EV/EBITDA. As not many cannabis companies have attained profitability yet, we have not gone for the much-used PE multiple. First, let’s look at the forward EV-to-sales multiple of both companies.

How Do ACB’s and WEED’s Valuation Multiples Compare?

Forward EV-to-sales multiples of ACB and WEED

The fall of over 50% in Aurora’s stock price has brought its valuation multiple down. As of December 20, the company was trading at a forward EV-to-sales multiple of 5.24x. This is compared to 7.58x at the beginning of this year. However, the decline in analysts’ revenue expectations for the next four quarters has offset some of the declines. At the beginning of this year, analysts were expecting Aurora to report revenue of 866.0 million Canadian dollars. However, as of December 20, analysts were projecting the company to report revenue of 706.4 million Canadian dollars in its next four quarters. The weaker performance in the last two quarters, its management’s decision to scale back its expansion plans, and the decline in cannabis demand could have prompted analysts to lower their revenue estimates.

As of December 20, Canopy Growth was trading at a forward EV-to-sales multiple of 9.78x compared to 17.15x at the beginning of this year. The decline in Canopy Growth’s stock price appears to have brought its valuation multiple down. However, analysts’ lowering of their revenue expectations for the next four quarters has offset some of the declines. At the beginning of this year, analysts projected Canopy Growth to report revenue of 771.8 million Canadian dollars. However, analysts have lowered their revenue estimates to 750.3 million Canadian dollars as of December 20. The decline in demand for cannabis and pricing pressure could have prompted analysts to lower their revenue estimates.

From the graph above, we can see that both the companies’ EV-to-sales multiples were higher than their peers’ median value of 3.68x as of December 20. On the same day, both ACB and WEED were trading below their historical average of 10.48x and 14.87x, respectively.

How Do ACB’s and WEED’s Valuation Multiples Compare?

Forward EV-to-EBITDA multiples

As of December 20, Aurora Cannabis was trading at a forward EV-to-EBITDA multiple of 69.0x compared to 25.3x at the beginning of 2019. Although the company’s stock has fallen over 50%, its valuation has increased. The decline in analysts’ EBITDA estimates for the next four quarters has led to a rise in the company’s valuation multiple. Analysts projected the company to report an adjusted EBITDA of 259.7 million Canadian dollars at the beginning of this year. However, they have lowered their projections to 53.59 million Canadian dollars as of December 20.

Canopy Growth’s forward EV-to-EBITDA multiple has fallen from 91.6x at the beginning of this year to a negative 34.6x. At the beginning of the year, analysts projected WEED to report EBITDA of 144.45 Canadian dollars in the next four quarters. However, they lowered their EBITDA estimates for the next four quarters to -212.1 million Canadian dollars as of December 20. Pricing pressure and the delay in the launch of higher-margin Cannabis 2.0 products could have prompted analysts to lower their estimates.

From the graph above, we can see that ACB’s EV-to-EBITDA was higher than its peers’ median value. However, WEED’s EV-to-EBITDA was lower than its peers’ median value. For more on cannabis-related news, visit 420 Investor Daily.