The Motley Fool

This 1 Stock Puts Canopy Growth (TSX:WEED) to Shame

Image source: Getty Images

If Aurora Cannabis decided to invest tens of millions of dollars in a company, would you follow suit or shy away?

For me, I would definitely follow suit as Aurora Cannabis has a market capitalization of $5 billion which gives it credibility in my books.

The investment I am talking about is the one Aurora Cannabis made in Alcanna (TSX:CLIQ), whereby it currently holds 25% of Alcanna’s outstanding shares. In May 2018, Aurora Cannabis purchased 2.3 million shares of Alcanna for $34.6 million, resulting in a cumulative share ownership of 9.2 million shares, or 25% of the company.

At the price it paid, Alcanna has an implicit share value of $15.04 per share, which represents a 189% gain from its current share price of $5.20. Investors will also be pleased to hear that Alcanna is expanding its retail cannabis division.

Similar to the situation with Fire & Flower and the investment from Couche-Tard, Aurora Cannabis’s investment gives investors some assurance as to the future growth prospects of Alcanna.

We will now examine Aurora Cannabis’s investment and Alcanna’s income statement.

Aurora Cannabis investment

Aurora Cannabis’s initial investment in Alcanna consisted of $103.5 million for 6.9 million shares. This is equivalent to a 19.9% stake in the company.

For those of you unfamiliar with Aurora Cannabis, it’s one of Canada’s largest medicinal and recreational marijuana companies. It is headquartered in Edmonton, Alberta and participates in the cultivation and sale of marijuana.

Its brands include Aurora, CanniMed, MedReleaf and San Rafael ’71. It has operations across the world and is currently active in more than 25 countries.

Following Aurora Cannabis’s initial investment, the company also made an investment of $34.6 million in May 2018 for an additional 2.3 million shares, which results in Aurora Cannabis having 25% ownership of Alcanna.

Given the price Aurora Cannabis paid, Alcanna’s stock has an implied value of $15.04 per share, representing a 189% upside to the current price. This is good news for investors looking for a stock with growth potential.

Poor income statement

I’m not going to beat around the bush when it comes to Alcanna’s income statement. The company has definitely dropped the ball.

Alcanna has lost money in three of the past five fiscal years. Net losses in fiscal 2015 were $100 million, which improved to a $1 million net income in fiscal 2016 before a net loss of $31 million in fiscal 2017 and a net loss of $159 million in fiscal 2018.

The company has not been successful in turning revenue into bottom line profits for its investors. Alcanna has an accumulated net loss of $276 million in the past five fiscal years, which is not good.

Summary

Alcanna is unique in the sense that not many TSX companies have the backing of a billion-dollar cannabis company. With Aurora Cannabis’s $34.6 million investment in Alcanna in 2018, investors have some reassurance that Alcanna will eventually deliver decent returns.

I mentioned above that Alcanna has suffered a net loss in three of the past five years. Despite this, I still believe that Alcanna is worth the risk as an investment from Aurora Cannabis is a strong indication that the company has future growth potential.

At the end of the day, the decision is yours. If you’re an investor that can stomach risk, I would look into Alcanna.

If you liked this article, click the link below for exclusive insight.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Chen Liu owns shares of FAF. Alimentation Couche-Tard is a recommendation of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.