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Aurora Cannabis vs. Aphria Inc: Will Data Science Deliver Returns for Stock Investors?

Brian Paradza, CFA
·4 mins read
potted green plant grows up in arrow shape
potted green plant grows up in arrow shape

Management at Aphria Inc (TSX:APHA)(NASDAQ:APHA) made quite an unbelievable and yet intriguing claim in its fiscal fourth-quarter 2020 results published in July. It refuted a general market sentiment that plunged marijuana stocks over the past several months. Interestingly, Aurora Cannabis‘ (TSX:ACB)(NYSE:ACB) new CEO Miguel Martin is of a similar mind. He will use Aphria’s proven strategy to revive ACB’s ailing fortunes.

Could a data-driven strategy deliver the revenue growth that Aurora Cannabis’s stock’s investors have been patiently waiting for?

Aphria’s bold data analytics claims

Marijuana industry analysts believe that the Canadian pot market is saturated and oversupplied right now. A surge in inventory across the industry value chain supports that claim.

Most noteworthy, HEXO, Canopy Growth Corp, and Aurora’s strategic asset disposals, layoffs, and shutdowns of production plants are evidence to this conclusion. New retail stores across the provinces, and perhaps lower pot prices to match underground market prices could help grow the market and reduce channel inventory levels…so everyone seems to believe.

Alas, Aphria is of a different opinion.

In a section headlined An Inconvenient Truth – Over or Undersupply in the Cannabis Market in the July 28 published management discussion and analysis (MD&A), the marijuana producer strongly disputes analyst opinions.

“Aphria believes that it is too simplistic to conclude that the Canadian cannabis market, as a whole, is in fact over-supplied.The company said and went on to claim that:

“Opportunities exist where cannabis is being undersupplied in certain channels and consumer needs are not yet met… using data analytics and understanding consumer preferences, the company can continue to strategically gain more market share in these categories.”

That was a bold claim. Actually, it’s hard to dismiss APHA’s claim. The results were there to prove it.

Data analytics gave APHA a competitive edge

Aphria has used data science to find and identify undersupplied niches in the marijuana market.

It discovered that the vapes category has a high trial rate for cannabis consumers but there was not enough product differentiation. The company developed specially terpene blends and cannabinoid ratios targeted at satisfying under-served niches and the strategy saw positive consumer feedback and repeat purchases.

Further, the same approach was used in dry flower products. Results were an increase in market share with minimal and reasonable price reductions. Winning market share in higher-margin products is the kind of progress any business would want to report.

Unfortunately, Aurora took a different path over the past few quarters. The company concentrated on pushing its value brand. Competitors followed suit, and the result was high sales volumes yet with declining total revenue.

Will data science win the game for Aurora Cannabis stock investors?

Aurora Cannabis has been losing ground in the high-margin consumer cannabis segment for several quarters now. The newly installed CEO Miguel Martin has a tough task to turn the ship around during a perfect storm. The man believes that data analytics results from the United States pot markets can help identify good opportunities in the Canadian recreational market.

Aurora is taking the game to competitors in a bid to recover lost ground in the high margin pot categories. Using data analytics, Miguel will work on reviving premium product lines. He believes provincial wholesalers and retailers in Canada are very much interested and willing to move such product categories. This is the company’s identified strategy to improve gross profits and reach its positive adjusted EBITDA and cash flow targets in 2021.

Foolish bottom line

Competition is tough in the adult-use marijuana market, and it’s getting bloody. Following Aphria’s success, ACB is turning to data science to outwit the competition. Notably, if the strategy works, then Aurora Cannabis’s stock price could violently recover from current all-time lows.

That said, competitors will use the same tools to defend market share. Retailers Namaste Technologies and Fire & Flower are licensing their AI-powered data analytics software to third parties. HEXO and Canopy Growth once advertised marketing roles that required data analytics experience.

The competition game has gotten to a new level in the Canadian recreational market. Let’s see who wins the game for marijuana stock investors.

The post Aurora Cannabis vs. Aphria Inc: Will Data Science Deliver Returns for Stock Investors? appeared first on The Motley Fool Canada.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. and Namaste Technologies.

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