Charlotte's Web (CWBHF 1.93%) and CV Sciences (CVSI 1.95%) are both purveyors of cannabidiol (CBD) oil, and they've also been some of the most profitable cannabis-related operations in 2019. That's because the nonpsychoactive component of marijuana is an ideal gateway product for consumers who don't want to get high but still want to try marijuana for its perceived medical benefits.
Which of these top CBD stocks to buy is the better pick right now? Let's stack them side by side to see which has a better chance to outperform over the long run.
The case for Charlotte's Web
The new U.S. farm bill that recently legalized all hemp-based products, including CBD, has invited a swarm of potential competitors into this Colorado company's home turf. Charlotte's Web describes itself as the market leader in hemp-based CBD products, and it's quite possibly the most established brand in the industry.
There were already hundreds of businesses processing hemp into high-margin CBD before the farm bill made it legal in every state, but that hasn't diminished the strength of the Charlotte's Web brand. In the space of one year, the company expanded its retail presence by 309% to 7,871 locations at the end of June.
The stock has risen around 51% over the past 12 months because it doesn't look like Charlotte's Web needed to significantly lower prices to grow sales in the face of increased competition. Revenue reported during the second quarter rose 45% compared to the previous-year period, while its gross profit after subtracting the cost of goods sold remained high at 73% of top-line revenue.
Unlike nearly all of its cannabis-producing cousins, Charlotte's hemp-based CBD operation has been steadily profitable for a long time, but rapid expansion has kept those profits from growing recently. In the first half of 2019, operating expenses jumped 98% and they'll probably grow much further in 2020. The company recently leased a new 136,610-square-foot industrial building and doesn't expect it to run at full capacity for at least two years.
If demand for Charlotte's CBD products doesn't continue surging, the company could have trouble making ends meet. This concern hasn't stopped investors from driving up its market cap to $964 million at recent prices, which is a lot for a company that will probably earn less than $10 million this year.
The case for CV Sciences
Simply mentioning the impact of incoming competition caused shares of CV Sciences to slip recently despite a relatively strong performance in the second quarter. Now shares of this CBD manufacturer look like a bargain compared to Charlotte's Web. In the first half of the year, CV Sciences reported a $22.5 million gross profit that was nearly two-thirds as much as Charlotte's Web over the same period. At recent prices, though, CV Sciences' $318 million market cap is less than one-third the size of Charlotte's Web.
In the first quarter, CV Sciences recorded a $7.9 million charge associated with modifications to a former CEO's stock options that caused the company to post a net loss of $8.2 million in the first half of the year. It's important to note that CV Sciences has generated a positive $3.0 million in free cash flow in the first half of 2019. In contrast, Charlotte's Web reported a net gain over the same period, but free cash flow came in at a negative $19.3 million.
CV Sciences' recent performance hasn't been quite as impressive as Charlotte's, but it's still pretty good. Second-quarter sales of CBD oil rose 36% year over year, and gross profits reached 71% of top-line revenue. The period also marked the 14th consecutive quarter with sales that exceeded the previous quarter.
A new 45,500-square-foot facility should allow CV Sciences to continue its streak of revenue growth. The addition is expected to increase the company's production capacity by around 500% next year.
Although CV Sciences can't market its products with claims that they improve sleep and reduce appetite without dangerous side effects, the Food and Drug Administration can't stop CV Sciences from mentioning results of a controlled clinical trial that surfaced in June: Overweight but otherwise healthy patients given the company's PlusCBD Oil reported significant improvements to sleep quality and overall pleasure from life compared to the placebo group.
It's in the numbers
There's a lot to like about Charlotte's Web, but its current price is so high right now that the stock is a little too risky. Although the CBD industry could grow to more than $20 billion annually in a few years, there are already heaps of manufacturers jostling for top spots currently held by Charlotte's Web and CV Sciences.
While Charlotte's Web has a popular brand now, investors need that brand to remain on top for a long time if they're going to see a return on their investment. Shares of CV Sciences, at a more reasonable valuation of just 6.1 times trailing sales, have a better chance to provide a market-beating return. That makes it a better CBD stock to buy right now.