Marijuana investors have experienced a whirlwind ride over the last 24 months. In October 2018, Canada legalized pot for recreational use which resulted in a massive bull run as investors were overly optimistic about this development. However, as with any nascent industry, marijuana producers also faced a number of teething issues. 

The Canadian pot producers have been grappling with competition from a thriving black market and the slow rollout of retail stores in major provinces. This in turn led to lower than expected demand and rising inventory levels.

Most cannabis companies are impacted by widening losses and million-dollar write-downs. This has meant marijuana companies north of the border are swirling in turmoil and burnt massive investor wealth in the last 18 months. The bull run of 2018 seems like a distant dream as the cannabis house of cards has come tumbling down at an unprecedented pace.

However, a Joe Biden win has renewed the hopes of cannabis investors. During the pre-election debate, Vice President-elect Kamala Harris said the Democrats will decriminalize marijuana use at the federal level and might even legalize it which has driven the recent recovery in pot stocks.

Let’s take a look if it’s the appropriate time to invest in beaten-down companies such as Aurora Cannabis (ACB) and Cronos (CRON).

Aurora Cannabis is down 93% from record highs

Shares of marijuana giant Aurora Cannabis are trading at $8.75 which is 93% below its record high. However, it has almost doubled since preliminary election results were announced on November 4.

In the September quarter, the company’s total cannabis net sales were down 4.1% at CA$67.8 million. While the sales decline is worrisome, investors should be even more concerned with Aurora’s EBITDA losses of CA$57.8 million, compared to a loss of CA$33 million in the prior-year period.

Aurora expects to achieve a positive EBITDA in the December quarter but it seems like a pipe dream right now for a company that is grappling with falling sales. Even though Aurora has managed to reduce operating expenses in recent quarters it needs to grow top-line at a fast clip and regain market share.

Aurora posted a net loss of $2.5 billion in fiscal 2020 that was driven by goodwill impairments which suggest the company has grossly overpaid for acquisitions. It has also had to raise equity capital multiple times due to severe cash burn which diluted shareholder wealth to a large extent.

Aurora Cannabis has to reach profitability within the next few quarters to keep investors interested and avoid further dilution.

Cronos stock is up 42% since November 4th

Shares of Toronto-based Cronos Group are trading at $8 which means it has gained over 40% this month. Despite the recent rally, Cronos stock is trading 65% below its record high. While Cronos is also unprofitable it is backed by tobacco giant Altria Group (MO), allowing the company access to growth capital as well as leveraging the latter’s deep pockets until it can achieve positive cash flow.

In Q3, Cronos sales were up a stellar 96% year-over-year at $11.4 million. Revenue growth was attributed to its acquisition of Redwood and growth in medical marijuana sales in Israel. It reported a gross loss of $1.5 million, compared with a gross loss of $3.1 million in the prior-year period.

Cronos has a diversified portfolio of products in the recreational and medical marijuana verticals. Further, Altria’s $1.8 billion investment in the company has meant it ended Q3 with a cash balance of $1.3 billion.

While Cronos stock is trading at a lofty price to forward price to sales multiple of 70x, its market cap to net assets ratio of 1.4x is reasonable.

The Final Verdict

It seems that Cronos is the clear winner between the two companies given the Altria investment, stellar revenue growth, and a healthy cash balance.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish.