The legal marijuana industry is on fire. With the legalization of recreational marijuana among adults in Canada and the steady march toward legalization in several other Western countries, investors have been piling into pot stocks over the past few years with the hope of catching lightning in a bottle.
Canadian pot titans Aphria (NYSE:APHA) and Aurora Cannabis (NYSE:ACB) are two prime examples. Both of these companies have seen their share prices rocket higher over the last three years, thanks to the industry’s overall rising tide.
As this emerging industry becomes ever more legitimate, however, there’s little doubt that cannabis investors will eventually begin to rely more heavily on fundamentals to guide their stock picks. With this theme in mind, let’s consider whether Aphria or Aurora is the fundamentally more sound long-term buy right now…
The case for Aphria
Aphria’s value proposition centers around three interrelated issues:
- Aphria has quickly become the third-largest producer of marijuana in Canada, with its annualized production capacity set to reach 255,000 kilograms by the end of 2019. That amount actually surpasses Aurora’s current capabilities (approximately 150,000 kilograms per year), but Aurora is in the process of building out a much larger growing capacity that should become fully operational by mid-2020 (more on this below).
- Aphria’s upper-echelon production capacity and greenhouse strategy have given it an early lead in terms of the cost of growing top-shelf cannabis. That said, the company’s cost of production per gram has been rising in recent quarters due to the implementation of new automation techniques, and other growers like Aurora have been lowering their costs across the board as well.
- This pot company also sports regional distribution agreements with every Canadian province, plus the Yukon Territory. As a result, Aphria has direct access to approximately 99% of the entire Canadian cannabis market.
The big knock against Aphria is the company’s recent spate of acquisitions that were deemed to be “worthless” by short-sellers Hindenburg Research and Quintessential Capital Management. Allegedly, these deals were undertaken for the sole benefit of Aphria insiders.
While it’s hard to judge whether this short thesis has legs, Aphria has been unable to attract a deep-pocketed partner and two of the company’s top executives did step down in the wake of these allegations.
The case for Aurora
Aurora likes to bill itself essentially as a “one-stop shop for all your marijuana and cannabis needs.” To make this sales pitch to investors and potential customers alike, the company has…
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