Better Buy: Sundial Growers vs. Aurora Cannabis

Marijuana stocks are down big this year. The Horizons Marijuana Life Sciences ETF has fallen 45%, which is deeper than the S&P 500‘s decline of 16%. Investing in the cannabis sector can be a risky prospect, especially in Canada, where the industry is smaller than in the U.S. and competition is fierce, with close to 900 licensed producers.

A couple of larger marijuana companies that might be worth considering are Aurora Cannabis (ACB 0.72%) and Sundial Growers (SNDL -3.73%). Today, I’ll look at how they stack up and which one is the better buy.

The case for Aurora Cannabis

Aurora Cannabis isn’t a risk-free investment by any means. It’s still diluting shareholders and fighting its way to achieving breakeven. Unfortunately, there also isn’t much in the way of sales growth, as the business has struggled with consistency, often seeing its top line decline on a year-over-year basis. 

But the positive is that the company is focusing more on costs and becoming more investable. Rather than high growth numbers, Aurora’s earnings releases now focus on its cost savings, and management aims to reach adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability. Aurora recently increased its cost-savings goal, now projecting that it can save up to 170 million Canadian dollars in annual costs by the first half of fiscal 2023 (its upcoming quarter will wrap up fiscal 2022). By then, it also anticipates a positive adjusted EBITDA run rate. 

Aurora has also been focusing more on the medical marijuana market. In its third-quarter results (period ending March 31), it touted that its international medical marijuana business grew 55% from the prior-year period. Medical marijuana revenue of CA$39.4 million was nearly four times the CA$10.3 million Aurora reported from the consumer cannabis segment. Three years ago, half of Aurora’s net cannabis revenue came from the medical market and the other half from the consumer side.

Medical marijuana products benefit from higher margins, and that’s a positive sign that Aurora is on the right track toward profitability. Its adjusted EBITDA loss of CA$12.3 million this past quarter was one-third of what it was three years ago (a loss of CA$36.6 million).

Trading at 1.6 times revenue, Aurora’s stock is also drastically cheaper than the premium investors have been paying for it in the past:

Data by YCharts.

The case for Sundial Growers

Sundial Growers hasn’t been a whole lot better than Aurora when it comes to generating growth. Although it will likely have a record-setting performance in its current quarter, that’s only due to acquisitions. 

However, it’s those acquisitions that could make Sundial a much better buy moving forward. As a cannabis producer, it wasn’t growing. Now, with an alcohol business and owning more than 100 pot shops across Canada (thanks mainly to its acquisition of Inner Spirit last year), its operations have become more diverse. That also means there are more opportunities for the business to grow.

Alcanna, the liquor retailer Sundial acquired earlier this year, reported sales of CA$210.4 million for just the quarter ending Dec. 31, 2021. If Sundial reported that much revenue, even for a full year, that would be an impressive, record-breaking feat for the business. Moving forward, Alcanna will now be part of Sundial’s operations and can transform its business and make it less reliant on the cannabis market. That alone could make it a less risky buy.

And Sundial isn’t done with acquisitions by any means. The company has been looking to expand its operations further. Last month, it entered into a bid agreement to acquire the assets of cannabis producer Zenabis.

Why Aurora is a better buy than Sundial

I wouldn’t buy any of these stocks today, given how challenging it is for a company to succeed in the Canadian cannabis market. However, of these two stocks, I see Aurora as having more potential in the long run. While Sundial is diversifying, that may not mean the business is in better shape; last year, Alcanna incurred a CA$28.1 million loss from its continuing operations. And there’s simply too much uncertainty ahead in how Sundial’s business will perform after the dust settles from all these deals.

In contrast, Aurora has a simpler, more predictable future. Although it still has to prove it can hit adjusted EBITDA profitability, it looks like it’s on the right path. The company has learned from its mistakes and is finally making a serious effort to bring its expenses down. 

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.