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Comparing Canopy Growth and Aurora Cannabis’s Valuation Multiples

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Canopy Growth and Aurora Cannabis (NYSE:ACB) are two prominent players in the cannabis sector. So far in 2020, Canopy Growth has outperformed cannabis ETFs. YTD, Canopy Growth stock has fallen by 25.2%. During the same period, the ETFMG Alternative Harvest ETF (NYSE:MJ) and the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) have fallen by 33.1% and 31.3%, respectively. The delay in the roll-out of retail stores in Ontario, pricing pressure, thriving black market sales, and lower-than-expected demand for Cannabis 2.0 products have dragged the cannabis sector down. However, Canopy Growth’s strong third-quarter performance and the introduction of Cannabis 2.0 products helped it mitigate some of the effects of weakness in the sector.

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Meanwhile, Aurora Cannabis has lost 56.3% of its stock values during the same period. The company’s stock price fell due to weak second-quarter performance, rising debt, weakening cash position, and concerns about dilution through new equity offerings. Now, we’ll compare both companies’ valuation multiples.

Comparing Canopy and Aurora’s EV-to-sales multiple

Since Canopy Growth (NYSE:CGC)(TSE:WEED) and Aurora Cannabis aren’t profitable yet, we considered the forward EV-to-sales multiple and forward EV-to-EBITDA multiple for our analysis.

As of April 9, Canopy Growth was trading at a forward EV-to-sales multiple of 8.31x compared to 10.66x at the beginning of the year. The decline in the stock has dragged the company’s valuation multiple down. However, the decline in analysts’ revenue estimates for the next four quarters offset some of the declines. As of April 9, analysts expect the company to report revenue of 698.9 million Canadian dollars in the next four quarters. The amount is lower than their expectation of 728.9 million Canadian dollars at the beginning of 2020. Analysts lowered their revenue estimates due to the delay in introducing cannabis-infused beverages, closing some cultivation facilities, and weaker-than-expected demand for Cannabis 2.0 products.

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Aurora Cannabis was trading at a forward EV-to-sales multiple of 4.40x as of April 9—a decline from 5.15x at the beginning of 2020. The decline of 50% in the company’s stock price has dragged its valuation multiple down. Meanwhile, the decline in analysts’ revenue expectations for the next four quarters has lowered the company’s valuation multiple. As of April 9, analysts projected that the company will report revenue of 415.2 million Canadian dollars in its next four quarters. The amount is a big drop from their estimates of 686.3 million Canadian dollars at the beginning of 2020. Pricing pressure and weaker demand might have prompted analysts to lower their estimates.

Canopy Growth and Aurora Cannabis’s EV-to-EBITDA multiple

As of April 9, Canopy Growth’s forward EV-to-EBITDA multiple was negative 26.6x. At the beginning of 2020, the company was trading at a negative forward EV-to-EBITDA of 34.4x. The decline in analysts’ EBITDA expectations for the next four quarters has impacted the company’s valuation multiple. As of Thursday, analysts expect the company to report a negative EBITDA of 218.3 million Canadian dollars. The estimate is an improvement from a negative EBITDA of 226.0 million Canadian dollars as of January 1, 2020. Meanwhile, the company is trading lower than its historical average of 71.9x since the beginning of 2017. Also, the company’s valuation multiple is below peers’ median value of 7.57x.

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Meanwhile, Aurora Cannabis’s forward EV-to-EBITDA multiple has increased from 79.3x at the beginning of 2020 to 164.2 as of April 9. The decline in analysts’ EBITDA estimates increased the company’s valuation multiple. However, some of the declines have been offset by a slump in the stock price. As of April 9, analysts expect Aurora Cannabis to report an EBITDA of 11.1 million Canadian dollars. The amount is lower than analysts’ expectation of 44.6 million Canadian dollars at the beginning of 2020. Analysts might have lowered their EBITDA estimates due to lower-than-expected demand for higher-margin Cannabis 2.0 products and pricing pressure. Aurora Cannabis has been trading above its historical average of 34.5x since the beginning of 2017. Also, the company trades above peers’ median value.

My take

I think that Canopy Growth is well-positioned to capture the growing Cannabis 2.0 market. The company has already introduced cannabis-infused chocolates and beverages in Canadian markets. Canopy Growth has also introduced its CBD brand “First and Free” in the US. Most cannabis companies are struggling for cash. In contrast, Canopy Growth had gross cash of 2.3 billion Canadian dollars at the end of the third quarter. So, I’m optimistic about the stock. I think that investors with a longer horizon should accumulate the stock. However, Aurora Cannabis is struggling with rising cash, a weakening cash position, and concerns about dilution. So, I think investors should avoid this stock. Raising capital could become more difficult amid COVID-19.

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