How Do Canopy and Aurora’s Valuations Compare?

Both Canopy Growth (CGC) (WEED) and Aurora Cannabis (ACB) reported their quarterly earnings results on November 14. In the second quarter of fiscal 2020, Canopy Growth missed its revenue, EBITDA, and EPS estimates. For more info, read Canopy Growth Stock Falls after Weak Q2 Earnings. The company’s weak second-quarter performance led its stock to fall. However, Bank of America’s upgrade to a “buy” offset some of the decline. As of December 4, the company was trading at 24.25 Canadian dollars, which implies a fall of 0.8% since it reported its second-quarter earnings.

On December 4, Aurora was trading at 3.26 Canadian dollars, implying a fall of 25.6% since it reported its fiscal 2020 first-quarter earnings. During the quarter, the company posted lower-than-expected revenue and EBITDA. Its management also announced an early conversion of debentures with a maturity of March 2020 and said it would scale down its expansion plans due to a decline in cannabis demand. All these factors contributed to Aurora’s stock price fall.

In the wake of these recent events, let’s look at both companies’ valuations. For our analysis, we’ll consider the forward EV-to-sales (enterprise value-to-sales) multiple and the forward EV-to-EBITDA multiple.

How Do Canopy and Aurora’s Valuations Compare?

Forward EV-to-sales multiples of Canopy and Aurora

On December 4, Canopy Growth was trading at a forward EV-to-sales multiple of 8.78x compared to 6.50x on November 13. Despite the decline in the company’s stock price, its forward EV-to-sales multiple rose as analysts reduced their next four quarters’ worth of revenue estimates. Before its second-quarter results, analysts were expecting the company to report revenue of 989.1 million Canadian dollars. By December 4, they’d lowered their consensus estimate to 750.6 million Canadian dollars. The decline in demand for cannabis, pricing pressures, and Canopy’s weak second-quarter sales could have prompted analysts to cut their estimates.

Aurora’s forward EV-to-sales multiple fell from 6.07x on November 14 to 5.41x on December 4. The decline in the company’s stock price lowered its valuation multiple. However, analysts’ lowering of their revenue estimates for the next four quarters offset some of the decline. On November 14, analysts projected that the company would report revenue of 812.62 million Canadian dollars. However, they’d lowered their estimate to 743.74 million Canadian dollars as of December 4. Management’s decision to scale down on its expansion plans, lower-than-expected first-quarter revenue, and sector weakness could have prompted analysts to lower their estimates.

Both Canopy and Aurora were trading above the peer median value of 2.49x on December 4. We’ve considered 12 Canadian cannabis companies to calculate the median.

How Do Canopy and Aurora’s Valuations Compare?

Canopy’s and Aurora’s forward EV-to-EBITDA multiples

Before Canopy reported its second-quarter earnings results, analysts expected its next four quarters’ worth of EBITDA to be -99.0 million Canadian dollars. However, they’d lowered their consensus estimate to -210.27 million Canadian dollars as of December 4. Pricing pressures and the company’s investment in Cannabis 2.0 products could have prompted them to lower their EBITDA estimates. On December 4, WEED was trading at a forward EV-to-EBITDA multiple of -31.35x, lower than its historical average of 71.93x.

Despite the fall in its stock price, Aurora’s forward EV-to-sales multiple rose from 38.23x on November 14 to 55.36x on December 4. The lowering of analysts’ EBITDA estimates for the next four quarters drove the company’s valuation multiple. Before its first-quarter earnings, analysts expected Aurora to report EBITDA of 129.08 million Canadian dollars. However, they’d reduced their estimate to 72.76 million Canadian dollars as of December 4. The company was also trading above its historical average valuation of 34.51x.

Aurora was trading above the peer median value on December 4. However, Canopy was trading below the median on the day.

Analysts’ recommendations

Now that we’ve considered the valuations of Canopy Growth and Aurora, let’s look at analysts’ recommendations. Analysts favor a “hold” rating for Canopy Growth, with 11 out of 21 analysts giving it “holds.” Of the remaining ten analysts, nine have given it “buy” ratings, while one has given it a “sell.” On December 4, analysts’ consensus price target stood at 28.92 Canadian dollars, suggesting a return potential of 19.2%.

Of the total 17 analysts that cover Aurora Cannabis, eight have given it “buy” ratings. Of the remaining nine analysts, seven have given it “holds,” while two favor “sells.” As of December 4, analysts’ consensus price target on ACB stands at 5.72 Canadian dollars, suggesting a return potential of 75.3%.

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