If the past predicted the future, it would be no contest for investors choosing between MedMen Enterprises (OTC:MMNFF) and Village Farms International (NASDAQ:VFF). So far this year, MedMen is down more than 35% while Village Farms has skyrocketed nearly 220%.
But the past doesn't predict the future. Which of these stocks is the better pick going forward? Here's how MedMen and Village Farms stack up against each other.
The case for MedMen
MedMen ranks as the most recognizable cannabis retailer in the U.S. The company currently operates 37 stores with its flagship stores located in Los Angeles, Las Vegas, and New York. MedMen claims a market share of 7% in California, the largest legal cannabis market in the world.
The company's revenue has grown steadily over the four quarters as MedMen has opened additional stores. In its fiscal 2019 fourth quarter, MedMen generated total sales of $42 million. Nearly two-thirds of that amount was made in California.
Based on the experiences of other consumer packaged goods (CPG) markets, retailers could control the supply chain in the cannabis industry. Most states that have legalized cannabis have tight regulations and limit the number of retail licenses allowed. This works in MedMen's favor as the company has expanded quickly to establish footprints in multiple key states.
Wall Street analysts think that MedMen has significant upside potential. The company owns 92 retail licenses across 12 states with its pending acquisitions included in the count. MedMen plans to replicate its successful business model used in California in additional states, especially Florida.
The biggest knock against MedMen right now is that it isn't yet profitable. However, the company has been burning through cash to fund its major expansion effort. Once this "land grab" slows down, MedMen think that it should be on a path to profitability as most of its new stores pay for themselves within one year of opening.
The case for Village Farms
Village Farms started out as a greenhouse grower of produce including bell peppers, cucumbers, and tomatoes. The company's Pure Sunfarms joint venture with Emerald Health Therapeutics (OTC:EMHTF), however, has transformed Village Farms into a fast-rising cannabis producer.
Thanks in large part to the Pure Sunfarms joint venture, Village Farms' revenue has soared. The company reported year-over-year sales growth of 27% in the second quarter.
Pure Sunfarms is on track to become one of the top-tier Canadian cannabis producers based on production capacity. The joint venture currently can grow 75,000 kilograms of cannabis on an annualized basis. Its capacity should double by the end of next year with the addition of a second facility.
Village Farms isn't just focused on the Canadian cannabis market. The company has begun growing hemp outdoors in the U.S. It expects to sell hemp biomass in the fourth quarter of this year and begin selling CBD oils in 2020. Village Farms thinks that its decades of experience supplying major U.S. retailers with produce products gives it an advantage in its goal to become a major hemp CBD products supplier.
Unlike many cannabis producers, Village Farms is already profitable. The company has recorded three consecutive quarters of profitability, although it has received some help from adjustments in the valuation of its biological assets.
Better marijuana stock
Which of these two marijuana stocks is the better choice? It's hard to ignore Village Farms' profits and rapid growth. However, over the long term, I think that MedMen is more likely to deliver better returns as its pace of expansion slows and the company can begin to reap the rewards of its investments.
I'm also at least a little concerned about the potential of a supply glut in the Canadian market in the not-too-distant future. When supply catches up with demand, cannabis prices in Canada could plunge, hurting Village Farms in the process.
But while I think that MedMen gets the nod over Village Farms, I'm not sure the timing is right to buy the stock just yet. My preference would be for MedMen to first begin to clearly demonstrate that it's on the right track to profitability. In the meantime, my view is that investors interested in marijuana stocks have even better options available.