A lot has been made of the competition between top Canadian cannabis producers Aurora Cannabis (OTCQX:ACBFF) and Canopy Growth Corp. (OTCPK:TWMJF) as Canada gets ready to legalize recreational pot, which will increase demand by a significant amount in the years ahead.
The general consensus is Canopy should be able to defend its leading position over the long term as the companies stand today in regard to square footage and production capabilities, with Aurora Cannabis following close behind.
Over the long haul that is the most likely scenario that will play out if there are no more major acquisitions by either company, but in the short term Aurora appears to have the upper hand based upon its project production capabilities in 2018 and early 2019.
That suggests it could surprise some investors to the upside if it’s able to garner more market share in the near term, which is very possible.
Projected output of Aurora Cannabis
At this time there is some uncertainty as to the timing of Canadian legalization and how long it’ll take to get everything aligned to serve that market. For Aurora, based upon its output projections, the sooner it happens the better.
The reason is Canopy has guided for production to be at about 90,000 kg by the end of 2018 – although it has said it should be able to double that in 2019.
On the other hand, Aurora has estimated it have approximately 130,000 kg of output by the end of 2018. This gives it the potential to vastly outsell its top rival in the latter part of the year, and probably in the first part of 2019, depending on how quickly Canopy can ramp up production.
Since I believe traders are going to dominate the cannabis market for some time to come, this plays well into the hands of those wanting to generate some fairly quick gains.
With Canopy attracting most of the attention, the challenge for Aurora will be in waiting for its earnings report. The market could reward Canopy based upon assumptions that are based on performance in the short term.
If Aurora does deliver on its estimates or surpasses them, and Canopy performs close to its guidance, it should experience a nice upward move in its share price. The level will be determined some by its accompanying guidance.
Interestingly, Aurora has guided for revenue for 2018 to be at about $70 million, while Canopy has guided a little higher, coming in at a range of $75-80 million.
That implies to me that Aurora doesn’t see the assumed additional revenue coming from higher production being able to overcome Canopy for all of 2018. I’m not saying Aurora won’t get a nice bump if it outperforms Canopy in the fourth quarter, because it will. What I am saying is Canopy’s output over the first three quarters of the year will be too much for Aurora to overcome.
I see the same for 2019, with Aurora probably enjoying a solid first quarter for production when measured against Canopy, but leveling out more as Canopy boosts production during 2019.
Longer term outlook
When it comes to current, visible capacity, Canopy is by far the leader. This suggests that if demand is robust, it will be able to, over time, surpass Aurora Cannabis in output – probably in the second half of 2019.
Canopy announced in February it has plans to add two more facilities in British Columbia, Canada, which should over two million square feet to its production capacity when completed. Domestically, that would bring the total square footage to 5.6 million square feet.
For Aurora, it currently has the 100,000 square footage it obtained with the acquisition of CanniMed, along with the 55,000 square foot facility in Mountain View County, Alberta, along with a 40,000 square foot facility in Pointe-Claire, Quebec. It’ll add another 800,000 square feet once it completes its Aurora Sky facility in Edmonton.
On the surface it would seem Canopy has a significant advantage over Aurora, and over the long term that’s true. But it’ll take some time for Canopy to reach its full potential, which is why the guidance through 2019 is very close to one another.
For all of 2019 Aurora estimates revenue to be at about $350 million, while Canopy has guided for $375 million.
It’s highly probable that Canopy will outperform Aurora annually over the next couple of years, based upon where the two companies stand today. Where Aurora is likely to surprise is in the last quarter of 2018, and maybe in the first couple of quarters of 2019.
For traders this should provide an opportunity to generate some decent gains. That’s especially so if the market is looking at the two major competitors over the long term, and is caught by surprise if Aurora does deliver far more supply than Canopy over the latter part of 2018 and early part of 2019.
It also should be noted that Aurora Cannabis has a proven track record of being able to increase production at a faster pace than that of its major rivals. This means if it continues to do so, it could not only provide a quarter of two of outperformance, but possibly an additional one as well.
If Canopy continues to increase output at a slower pace, I see Aurora as being the better play in the short term, with it outperforming Canopy through the first quarter of 2019 and holding its own for the remainder of the year. It could do even better if Canopy falters in any way.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.