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Comparing ACB and CGC’s Valuation Multiples after Their Earnings

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Last week, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC)(TSE:WEED) reported their earnings. On February 13, Aurora Cannabis reported its results for the second quarter of fiscal 2020. Meanwhile, Canopy Growth reported its third-quarter earnings on February 14.

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Stock performance

In the second quarter, ACB reported revenues of 56.0 million Canadian dollars and a negative EBITDA of 80.25 million Canadian dollars. Both of the amounts missed analysts’ expectations. To learn more, read Aurora Cannabis Missed Analysts’ Expectations in Q2. Despite the weak performance, Aurora Cannabis stock has increased by 11.2% since it reported the second-quarter earnings. Investors were prepared for a much worse performance. As a result, they were relieved with ACB’s second-quarter performance.

In the third quarter, CGC reported revenues of 123.7 million Canadian dollars and a negative EBITDA of 91.7 million Canadian dollars. Both of the amounts beat analysts’ expectations. To learn more, read Canopy Growth Surprised Investors with Its Q3 Earnings. Canopy Growth stock rose due to the impressive third-quarter performance. As of Tuesday, CGC was trading at 29.08 Canadian dollars, which implies an increase of 12.4% since its third-quarter earnings.

Now, we’ll compare ACB and CGC’s valuation multiples. Since the cannabis sector is still in the growth phase and most of the companies haven’t attained profitability, we used the forward EV-to-sales and EV-to-EBITDA multiples for our analysis.

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ACB and CGC’s forward EV-to-sales multiple

As of Tuesday, Aurora Cannabis was trading at a forward EV-to-sales multiple of 6.27x—an increase from 5.73x before the announcement of its second-quarter earnings. The increase in the company’s stock price and decline in analysts’ revenue expectations drove the company’s valuation multiple. Since ACB reported its second-quarter earnings, analysts have lowered their revenue estimates for the next four quarters. As of Tuesday, analysts expect ACB to report revenues of 470.3 million Canadian dollars. Before the company’s second-quarter earnings, analysts expected it to report revenues of 505.8 million Canadian dollars in the next four quarters. Weaker-than-expected growth in the cannabis sector in the near term and pricing pressure might have prompted analysts to lower their revenue estimates. Despite the increase, ACB is still trading below its historical average of 10.5x since the beginning of 2017.

Canopy Growth’s forward EV-to-sales multiple also improved from 10.0x to 12.1x after its third-quarter earnings. The increase in CGC’s stock price drove the company’s valuation multiple. However, the increase in analysts’ revenue expectations for the next four quarters lowered the company’s valuation multiple. For the next four quarters, analysts expect CGC to report revenues of 719.0 million Canadian dollars. Before the company’s third-quarter earnings, analysts expected revenues of 715.3 million Canadian dollars. Canopy Growth’s impressive third-quarter performance might have compelled analysts’ to raise their revenue estimates. Despite the increase, CGC is still trading below its historical average of 14.7x since the beginning of 2017.

In the above graph, you can see that ACB and CGC were both trading above the peer median of 3.67x. We considered 12 cannabis companies to calculate the median value.

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Forward EV-to-EBITDA multiple

Before ACB reported its second-quarter earnings, it was trading at an EV-to-EBITDA multiple of 95.2x. However, the increased stock price and analysts’ lower EBITDA estimates raised the valuation multiple. As of Tuesday, ACB was trading at a forward EV-to-EBITDA multiple of 147.1x. Since the company reported its second-quarter earnings, analysts have lowered their EBITDA estimates for the next four quarters from 30.4 million Canadian dollars to 20.0 million Canadian dollars. Increased investments in Cannabis 2.0 products and pricing pressure might have compelled analysts to lower their EBITDA estimates. Also, the company was trading above its historical average of 34.5x since the beginning of 2017.

Analysts still expect CGC to report a negative EBITDA in the next four quarters. So, the company’s EV-to-EBITDA is in negative territory. As of Tuesday, the company was trading at a forward EV-to-EBITDA multiple of -39.7x. After Canopy Growth reported its third-quarter earnings, analysts lowered their EBITDA estimates for the next four quarters. As of Tuesday, analysts expect the company to report a negative EBITDA of 219.7 million Canadian dollars compared to a negative EBITDA of 229.8 million Canadian dollars before its earnings. Meanwhile, the company has traded below its historical average of 71.9x since the beginning of 2017.

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