Canadian pot stocks such as Aurora Cannabis (TSX:ACB) and Canopy Growth (TSX:WEED) have trailed the broader markets by a wide margin after marijuana was legalized in the country in late 2018. In fact, both marijuana stocks are down 99% below record levels, burning massive investor wealth.

Canadian licensed cannabis producers have wrestled with a slew of industry-wide headwinds that include cannibalization from illegal sales, rising competition, and overvalued acquisitions, all of which resulted in an oversupply of pot products, high inventory levels, and widening losses.

Let's see if Aurora Cannabis and Canopy Growth can finally stage a turnaround by the end of 2024.

Is Aurora Cannabis a good buy today?

Valued at $424 million by market cap, Aurora Cannabis reported revenue of $83.4 million in the fiscal first quarter (Q1) of 2025 (ended June), an increase of 12% year over year. Aurora Cannabis attributed its top-line growth to plant propagation revenue, which rose 16% to $23.1 million. While medical marijuana sales were up 13%, its retail cannabis declined by 10%.

In the last two years, Aurora Cannabis has moved away from the retail cannabis market and focused on the higher-margin medical marijuana segment. It also acquired a controlling interest in Bevo, a plant propagation business. Bevo is among the largest suppliers of vegetable plants in North America and provides Aurora Cannabis with an opportunity to diversify its revenue and lower its reliance on the competitive retail cannabis business.

In the last 12 months, Aurora Cannabis has reported revenue of $279 million, an increase of 12.3% year over year. Moreover, it ended the June quarter with a gross margin of more than 53%, compared to just 6.6% in fiscal 2023.

Its improving profitability allowed Aurora Cannabis to report a free cash flow for the first time in fiscal Q1. However, investors should note that the free cash flow could fluctuate depending on the timing of receivables collected and the payment of liabilities.

Aurora Cannabis is focused on expanding into other international markets and growing operations, which should improve revenue and earnings growth in the near term. Analysts tracking ACB stock expect it to gain 22% in the next 12 months.

Is Canopy Growth stock undervalued?

Valued at $678 million by market cap, Canopy Growth closed its retail operations in Canada in early 2023, offloading 28 company-owned stores under brands such as Tokyo Smoke and Tweed. While the retail cannabis segment initially looked promising, the rise in competition has led to lower product prices and massive losses for Canopy Growth and its peers.

In fiscal Q1 of 2025 (ended in June), Canopy Growth reported sales of $66.2 million, down 13% year over year. However, its gross profit rose by 67% to $23 million due to its cost-savings program, lower inventory write-downs and a transition towards higher-margin medical marijuana products.

Despite increasing its gross margins by 1700 basis points, Canopy Growth remains unprofitable and reported an operating loss of $21.3 million. Additionally, its free cash outflow stood at $55.7 million, compared to an outflow of $150.6 million in the year-ago period.

The Foolish takeaway

While Aurora Cannabis and Canopy Growth are improving their profit margins, both companies remain high-risk investments at current multiples. The pot stocks should showcase an ability to consistently deliver organic growth, service debt payments, and generate enough cash flow to fuel their expansion plans and gain investor confidence.