Many investors want exposure to the fast-growing cannabis space, which includes companies directly or indirectly involved with marijuana, hemp, and/or cannabidiol (CBD), the nonpsychoactive cannabinoid best known for its perceived medicinal benefits. It can be challenging, however, to decide which company to invest in, as many of them -- particularly the Canadian cannabis growers -- are only in the early stages of differentiating themselves.
Our quest here is to explore which of two leading growers -- Canopy Growth(NYSE: CGC) or Aphria(NYSE: APHA) -- currently looks like the better long-term investment.
Marijuana leaf positioned vertically upward in front of a sky filled with the colors of a rainbow.
Image source: Getty Images.
To set the stage for our face-off, the chart below shows how the two stocks have performed over the last year. Shares of many of the cannabis growers soared in the months preceding the opening of Canada's recreational market on Oct. 17 and then retreated as quickly as they ran up after the actual event in a rather typical "sell-on-the-news" manner.
As you can see, though, Aphria stock fell much more steeply than Canopy stock very late last year. This was due to a company-specific event, which we'll get to shortly.
CGC Chart
Data by YCharts.
Key data
Metric
Canopy Growth
Aphria
Primary business
Cannabis grower
Cannabis grower
Market capitalization
$16.6 billion
$1.8 billion
Price-to-sales (TTM)
95.2
18.2
Year-to-date 2019 return*
80.4%
24.8%
3 year return*
2,230%
484%
Data sources: Y!Finance and YCharts. Data as of 5/2/19. TTM = trailing 12 months. *The S&P 500 returned 17.1% for year-to-date 2019 and 40% over the three-year period.
The key takeaways here:
Canopy's market cap is much larger than Aphria's.
Canopy's stock has performed much better than Aphria's over both the near and longer terms.
Canopy's shares are pricier on a price-to-sales basis than are Aphria's. Neither company is profitable on a trailing-12-month basis, so the more standard price-to-earnings (P/E) ratio isn't a good valuation metric here.
Business snapshots
Both Canopy Growth and Aphria grow and sell medical and recreational marijuana products (dried and oils) in Canada, and also have notable foreign medical marijuana operations. Both companies are quickly expanding production capacity and have supply agreements in place with all of Canada's provinces.
Canopy bears a couple of additional comments. For one, last fall it received a $4 billion investment from alcoholic-beverage giant Constellation Brands, which increased its previous stake in Canopy to 38%. The two companies are developing cannabis-infused beverages, which are expected to be legal in Canada later this year. Secondly, Canopy has recently been making moves in the hemp-derived CBD market, which burst open on Jan. 1 upon enactment of the U.S. Farm Bill, which made it legal across the United States to produce hemp and products derived from marijuana's cannabis cousin.
Financials
Monetary figures in this chart are in Canadian dollars.
Metric
Canopy Growth
Aphria
Revenue (MRQ)
CA$83 million
CA$73.6 million
YOY revenue growth (MRQ)
283%
617%
Operating income (MRQ)
(CA$152.7 million)
(CA$30.3 million)
Net income (MRQ)
CA$67.6 million
(CA$108.2 million)
Cash and cash equivalents (MRQ)
CA$4.1 billion
CA$107.5 million
Data sources: Y!Finance and YCharts. Data as of 5/2/19. MRQ = most recent quarter. Canopy's MRQ was fiscal Q3 2019 ended 12/31, and Aphria's MRQ was fiscal Q3 2019 ended 2/28/19. YOY = year over year.
Canopy Growth and Aphria both reported explosive year-over-year revenue growth in their most recently reported respective quarters, driven by the opening of Canada's recreational marijuana market in mid-October. Canopy's most recently reported quarter started a couple of weeks earlier than this momentous event, so it doesn't make an apples-to-apples comparison with Aphria's most recently reported quarter.
Canopy's net income in the quarter was positive only because of the changes in fair value from the company's financial assets and liabilities. Like Aphria and nearly all the major cannabis players, the company is losing huge sums of money on an operating basis and a trailing-12-month net basis. They're pouring money into scaling up quickly to capture market share in the burgeoning space and on other initiatives aimed at spurring long-term growth.
Management
On the top management front, Canopy Growth has been the picture of stability while Aphria has recently experienced significant turbulence. Canopy has had the same two CEOs since the company was founded in 2013, with co-CEO and chairman Bruce Linton the more publicly visible of the two.
Aphria, founded in 2014, currently doesn't have a permanent CEO. In mid-January, it announced that its CEO Vic Neufeld and company co-founder Cole Cacciavillani will both "transition out of their executive roles in the coming months." Neufeld had led the company since its early days but he wasn't a founder. Irwin Simon is acting as the company's interim CEO. Simon previously served as CEO of organic food-maker Hain Celestial.
Aphria's turbulence began in early December when the company's stock plunged after the business was attacked by a co-authored short-seller report that alleged the company grossly overpaid for its LATAM Holdings acquisition. Recently, Aphria announced that the independent committee examining the allegations found that it paid a reasonable price for its Latin American assets. However, as my colleague Sean Williams recently wrote, "the committee also uncovered that 'certain of the non-independent directors of the Company had conflicting interests in the Acquisition that were not fully disclosed to the Board.'"
The better stock bet for the long term?
Canopy has the better shot of being a winning investment over the long term, in my view. The caveat is that both stocks pose considerable risk, with significant growth already priced in to both, particularly Canopy.
Canopy's top management is stable and respected in the industry, while Aphria's top management team recently imploded, leaving the company without a permanent CEO. This fact alone should lead many investors to pass on taking a position in this company at this time.
Putting money in any company is as much about investing in its top leader as it is in investing in its business. Moreover, Canopy's partnership with Constellation, along with its boatload of cash, make the company a much more formidable competitor in the cannabis market.
