Is Canopy Falling Behind Aurora?

Canopy Growth Corp. (TSX:WEED) has long played the role of heavyweight champion of the weed sector Canada, but with recent moves by two of its closest rivals, is Canopy in danger of losing its crown?

We delved into data from Google Trends and found that this likely not the case.

Overall, Aurora Cannabis reported a strong set of results for the second quarter, with robust revenue growth and improving margins. As the second-most valued cannabis company, Aurora Cannabis’ revenues trails only that of Canopy Growth, which reported Q2 2018 (ending September 2017) revenue of $17.6 million. In terms of costs, however, Aurora Cannabis scores over Canopy Growth with cash costs nearly a dollar lower at $1.74 per gram compared to Canopy’s $2.73 per gram. Going forward, the revenue gap between Aurora Cannabis and Canopy Growth should narrow as revenues (~$5.0 million) from Aurora Cannabis’ recent CanniMed Therapeutics acquisition start kicking in Q3 2018. Additionally, aggressive expansion plans coupled with a strong distribution network has ideally positioned Aurora Cannabis to capture the large recreational opportunity opening up in mid-2018.

Since the race began in earnest a few years back (with the election win of PM Justin Trudeau’s Liberals and their promise to legalize recreational cannabis), one company has stood taller than the rest: Canopy. The Smiths Falls, Ontario, company has made sure that it has the widest reach across our geographically challenging country, setting up operations in seven different provinces. At the same time, CEO Bruce Linton has led by example in how a Canadian pot company might become more than just a domestic success but an international leader by securing investments around the globe in countries still in the early stages of developing their cannabis industries.

SmallCapPower | February 9, 2018: Aurora Cannabis Inc. (TSX:ACB) Thursday reported a 200% YoY jump in revenues to $11.7 million for its second quarter of 2018, driven by higher patient numbers coupled with higher average sales price as well as strong growth in exports to Germany. Active registered patients surged 78% YoY in the second quarter to 21,718, which increased the grams sold nearly 116% to 1.16 million grams. The volume increase was accompanied by a 40.3% increase in average selling prices to $8.36 per gram in Q2 2018 from $5.96 per gram during the same period last year. In terms of segmental revenue breakdown, dried cannabis accounted for nearly 70% of total revenues at $8.2 million, with Canada contributing $5.7 million (up 24% sequentially and 79% YoY) and Germany $2.5 million (up 10% sequentially).

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And don’t forget about its position on the market leaderboard, where WEED commands the highest market capitalization among the pot stocks at $5.2-billion.

But what about Aurora Cannabis, which not only completed a takeover in January of CanniMed Therapeutics but recently jumped into the Western Canada retail market with an investment in Alberta’s Liquor Stores?

Higher business volume combined with higher average prices led to a 374% increase in gross profit to $6.9 million, translating into gross margins of 59%. However, Aurora Cannabis said gross margins on Aurora-produced cannabis was 73.8% for the quarter. Cash costs of sales per gram of dried cannabis produced improved to $1.74 for Q2 2018 from $2.16 in Q1 2018.

And don’t forget Aphria, from the “greenhouse capital of Canada” in Leamington, Ontario, which made recent headlines by selling its US pot holdings and scooping up medical cannabis company Nuuvera Inc.?

Both companies have seen lots of investment, too, with Aphria now sitting at a market cap of $2.51 billion and Aurora at $5.07, where it has almost caught up to Canopy.

Aurora Cannabis currently trades at a market cap of $5.24 billion, quickly catching up to Canopy Growth’s $5.38 billion market capitalization.

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Suffice to say that it’ll be a long while before the jury is in on who’s the real weed kingpin, as the rec market has yet to come about. And although you can find analysts with Buy ratings for all three stocks, there are other avenues to catch a glimpse of how public perception, at least, is faring vis a vis Canopy and the rest.

Take Google Trends, which crunches all the data on online searches and can act as a rough gauge of public interest in a topic. Tonnes of articles have been written on GT and its potential uses in stock and market analysis, with some accounts calling it a positive tool to add to one’s arsenal while others have concluded that, at best, it can give an indication of when things are about to go south, market-wise, with internet users increasing their searches for certain terms (“debt”, for instance) at times of uncertainty.

On the other hand, Aurora has not yet announced any provincial deal. Granted the largest markets in Canada have not announced their supply agreements such as Ontario, Quebec, British Columbia and Alberta. We think going forward it would be important to monitor which company is able to secure a higher market share in the key geographic regions. Canopy is better positioned in Ontario given its root in Smiths Falls, Ontario and most of its production facility in the province. Aurora is located in Alberta and CanniMed is based in Saskatchewan, another Western province. We think Canopy will face pressures as provinces often times favor local suppliers. However, both companies will have the ability to serve markets across Canada and we think Canopy will likely get a head start as its larger existing production facilities provide higher output and inventory while Aurora ramps up its Aurora Sky project over the next year, which has inherent risk due to execution.

But as far as the Canadian marijuana sector goes, here’s what we’ve found.

Canopy’s popularity as a search term (and thus, potentially, as an investment) hasn’t fallen off significantly over the past few weeks, even as its stock price has dropped. GT shows searches for “Canopy Growth Corporation” saw their 90-day and one-year peak during the first week of January, with popularity levels trailing since then but still at levels above anytime in 2017. That speaks to a sustained public interest, both in Canada and worldwide, in the company.

How interested are people in Canopy? Still only marginally so in comparison to companies in more well-established industries. A cross-sector comparison of Canopy to Telus, BMO, Barrick Gold and Air Canada shows that, from the Canadian perspective, at least, Canopy flies far under the radar of all of these giants, with the exception of Barrick.

Aurora is one of the up and coming names we have noticed and in our recent article “True Reasons Behind The CanniMed Acquisition” we discussed the importance of CanniMed’s history in medical marijuana, customer base and production capacity to Aurora. If you have to pick one cannabis company that has been the most active in corporate M&A we would have to say Aurora has been much more acquisitive than Canopy. Investors have cheered the rampant M&A activities at Aurora, sending its share price up more than 500% before the recent selloff. The recent volatility pushed the annual gain down to 300% but Aurora still outperformed Canopy by a large margin. Canopy so far produced 100% return in the past year including the recent selloff.

What about Canopy in comparison to other pot co’s? Unfortunately, as far as Google Trends goes, that will have to wait, since of the five Canadian marijuana companies with market caps over $1 billion — Canopy, Aurora, Aphria, MedReleaf and Chronos — so far, Google only recognizes Canopy as a topic (in other words, as a corporation rather than a group of search terms).

No doubt that will change as the sector gets up and running, but in the meantime, it’s at least indicative in itself that Canopy still holds a higher stature in the public consciousness than the other pot companies.

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Full text of the study, “Prevalence of problematic cannabis use in Canada: Cross-sectional findings from the 2013 Canadian tobacco, alcohol, and drugs survey,” appears in the Canadian Journal of Public Health.

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OTTAWA, ON — Only a small percentage of Canadians who consume cannabis do so in a manner that meets criteria for problematic use, according to data published in the Canadian Journal of Public Health.

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Authors reported that although the use of cannabis by Canadians was fairly common, few respondents reported that their use was associated with problematic outcomes.

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.

Researchers from the University of Waterloo estimated the prevalence of problematic cannabis use in a nationwide Canadian sample.

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“A very small proportion of Canadians report using cannabis to a degree that is problematic.”

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Truth be told, the United States could easily be the world’s most lucrative market for marijuana. Unfortunately, Congress has dug in its heels and isn’t adjusting its classification of pot as a Schedule 1 substance. This means it’s entirely illegal, is prone to abuse, and has no recognized medical benefits. It also puts cannabis businesses at a major disadvantage, with most unable to access basic financial services, and nearly all unable to take normal corporate income tax deductions thanks to U.S. tax code 280E.

As legalization looms for recreational marijuana, the burgeoning industry has agreed to call it cannabis

Within the U.S., for example, getting access to loans is incredibly difficult for marijuana companies. Canadian pot stocks, though, have had no trouble finding willing investors. Prior to announcing its acquisition of CanniMed Therapeutics, Aurora Cannabis has piled up more than $400 million in cash and cash equivalents on its balance sheet, almost entirely from bought-deal financing. This capital has been critical to expanding growing capacity in Canada’s ever-more-consolidated industry.

If, five years ago, someone had asked me how I felt about cannabis, I’d assume they were a cop.

Even the term “marijuana” – a word believed to be brought to the United States by Mexican migrant workers before the prohibition era, which was later used to promote racist anti-pot messaging – was a red flag to discreet and casual users such as myself.

Provincial mayors have frequently expressed concern since this past summer about have police and regulators in place prior to a July 2018 launch. While tax sharing was a valid issue, and mayors did chime in that a larger portion of the revenue pie was needed given their direct regulatory needs, this could simply come down to a matter of manpower. In other words, some of the provinces may not have regulators or police trained in time for a July launch.

Weed, cheeba, ganja, sticky-icky, dank nugs – terms the community has appropriated from Rastafarians, West Coast hippies, rappers and Indian yogis: These are the words that would have communicated familiarity and therefore acceptance of the habit. But what do you call it now that Canada has developed a sophisticated legal medical program and is close to passing its recreational cannabis legislation? Well, from black-market producers to young workers in illegal dispensaries to the burgeoning, optimistic legal industry: We’ve all agreed to say cannabis.

I joined the industry full-time last spring. First, I handled the social-media channels for a Canadian licensed producer of medicinal cannabis. Replacing “weed” with “cannabis” came naturally in a medical setting because, after all, it’s the proper botanical name for the plant.

It’s not just scientific: Marketers have another challenge, which is to try to reduce stigma and break through the stoner stereotypes. No, we’re not all lazy or forgetful. We don’t all wear Birkenstocks and tie-dye and talk like surfers. Using neutral language helps to market the product to a new, curious population that feels alienated by films such as Pineapple Express.

But in my new role as an editor for a Canadian cannabis news and reviews website, we know that “weed” is searched far more than “cannabis” or “marijuana” on Google. Weed stocks, surprising no one, is one of the most-searched terms on search engines. But some feel the word connotes something negative. (I would argue that it really it depends on your tone.)

But what’s even more interesting is how much language hasn’t changed. Cannabis is a marketer’s nightmare, and not just because Canada’s advertising regulations are likely going to look a lot like tobacco’s. It’s also complicated and not simple to unpack: There are so many different types of the plant with myriad and unconventional names; various ways of ingesting it and countless accoutrements that you never dreamed you would ever want to know about, let alone own. And – fortunately for those of us with a sense of humour – there just isn’t the time or desire to rebrand the whole lexicon.

And that’s why I love cannabis: Yes, it’s extremely complex and powerful. But it’s also very, very silly.

For example: strains. Would you like some Green Crack or are you more in the mood for a Sour Diesel? How about some Bubba’s Gift? There are innumerable strains of cannabis, and some licensed producers are developing proprietary genetics with even more names. Different strains produce different effects, so it’s important to know what you’re using, and I will never forget the time I heard a brand-new user extol the sleepytime virtues of “kush,” an indica (one of two categories of cannabis) derived from the Kush mountains in South Asia. Why? Because Snoop Dogg and Dr. Dre have a song dedicated to kush; rapper Wiz Khalifa called one of his mixtapes Kush & OJ, a winning combination I’m sure. It warms the heart.

Cannabis is a marketer’s nightmare, and not just because Canada’s advertising regulations are likely going to look a lot like tobacco’s.

Ingestion methods also present a steep learning curve when it comes to vocabulary. We all know that joints are, uh, “marijuana cigarettes,” right? (Has any cannabis user ever said that, ever, in the history of the universe?) And because we can all agree smoking spliffs, blunts and jimmies is generally bad for your health, new ingestion methods have been invented. Now, many patients registered with Health Canada are advised to buy a vaporizer or vape, which heats up your pot (or dried cannabis flower) in a portable oven to “decarb” it (or decarboxylate, which activates the psychoactive and anti-inflammatory compounds) without combusting it.

First, you put your flower in a grinder – simple palm-size steel technology that helps you break down your cannabis from a tight nugget to a fluffy substance. Then you fill a chamber with flower. Adjust your temperature settings, and once it’s ready, sip lightly on the mouthpiece. We call the flavours you taste “terps” (or terpenes), which are actually found in lots of other plants. Increasingly, cannabis consumers want to know more about terpenes, which were once described to me as the “essential oils” of cannabis. Substances such as limonene and myrcene are aromatic, and produce weed’s distinctive, unmistakable scent. Sometimes it’s a little skunky, sometimes it’s almost fruity, but … you know it. In Toronto, where I live, I smell it on the streets multiple times a day.

As you continue to grind your pot over time, a powdery, sticky substance called kief collects in the bottom chamber. Researchers have discovered that this is where the THC (tetrahydrocannabinol, the psychoactive compound) and CBD (cannabidiol, the anti-inflammatory, “body-buzz”-inducing non-psychoactive) are located, and it’s also what you make hash from. It’s gold, and many just mix it in with a joint or sprinkle it on to a bong hit.

Sorry, to continue: Flower that has been vaped now has an abbreviated term – ABV. This stands for Already Been Vaped. Yes, seriously! But it doesn’t matter, because you can recycle your ABV. Sprinkle it into your slow cooker with a few sticks of butter to make canna-butter for edibles. (But be careful. Think of the Toronto officers who recently called their own police department on themselves after eating edibles. Mostly harmless, but positively mortifying!)

And because the new legal industry isn’t just building on what the illegal industry innovated, defined black-market language is alive and well at Canada’s 80-plus licensed producers. Production facilities, sometimes hundreds of thousands of square feet in size, are still often referred to as “grows.” And some even sell “shake” – the lower-quality blends of bits and pieces of cannabis that have fallen off as the smokable flowers are trimmed from the plants. Shake is useful for edibles, too.

But there is one term that, for me, still distinguishes the activists and counterculture from the rest of us who are leaping on the new legal bandwagon. You know you’re talking to an old-school member of the cannabis community when they send you an e-mail and, instead of opening with, “Hi Kate,” they open with, “High Kate!”

I admit, there was a time that made me cringe. But when I’m watching the politics unfold with the worries about youth (who already use cannabis more than in any other country) or the new marketing campaigns aimed at de-stonerizing the culture’s reputation, it’s easy to forget that this was supposed to be fun. It’s easy to forget how we got here and why.

The government says they’re legalizing recreational cannabis because prohibition hasn’t dissuaded enough young people, whose developing brains could be affected, from using it. Nor has it prevented organized crime. But it was cannabis activists and, yes, drug dealers – who risked their reputations, their abilities to travel, their relationships with their families, their freedom – who created Canada’s enthusiasm for cannabis. Why? Because they believed in not just its medicinal applications, but also its power to bring people together to connect, tell jokes and have fun.

Cannabis, weed, whatever you want to call it: So long as it contains THC, it will make you feel high. No words can ever change that. Weed does alter your perception. And yes, it might also make you talk silly.


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