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Better Marijuana Stock: Canopy Growth vs. Cresco Labs

By Keith Speights – May 6, 2020 at 6:02AM

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Which stock wins in a battle between the top Canadian cannabis producer and one of the leading U.S. cannabis operators?

There's a general feeling of malaise in the air for cannabis stocks. And that malaise doesn't recognize international boundaries. Shares of the biggest Canadian cannabis producer, Canopy Growth (CGC 4.41%), are down nearly 70% over the last 12 months. It's a similar story for Cresco Labs (CRLBF -9.30%), one of the top U.S. cannabis operators.

In recent weeks, Cresco has enjoyed more momentum than Canopy. However, Cresco stock has also dropped roughly twice as much this year as Canopy's shares. But which of these marijuana stocks is the better pick for long-term investors?

Cannabis leaf in a tiny shopping cart.

Image source: Getty Images.

The case for Canopy Growth

What's the strongest argument for buying shares of Canopy Growth? A fellow named Bill Newlands has the answer. Newlands recently stated, "Canopy is best positioned to win in the emerging cannabis space and we are confident in the strategic direction of the company under David Klein and his team."

Bill Newlands, by the way, is CEO of Constellation Brands (STZ -2.25%), the adult beverage giant that is Canopy Growth's biggest shareholder. And Constellation is now an even bigger shareholder after exercising some of its warrants to buy more Canopy shares.

There's reason to believe that Newlands' view about Canopy could be right. The company is the market leader in the Canadian adult-use recreational marijuana market. That lead position could be expanded if Canopy's new cannabis-infused beverages gain traction in the Canadian market. For what it's worth, Newlands thinks these products will be "game-changers."

Canopy is also one of the top players in Germany, home to the largest medical cannabis market outside of North America. It can't compete yet in the U.S. cannabis market due to federal laws. However, Canopy is ready to quickly jump into the U.S. market if those laws change thanks to its option to acquire U.S.-based cannabis operator Acreage Holdings.

The relationship between Canopy and Constellation is another reason why Canopy could be the biggest winner in the global cannabis industry over the long run. Canopy has plenty of cash as a result of Constellation's multibillion-dollar investment.

It also has an experienced and capable new CEO, David Klein, who previously served as Constellation's CFO. Should U.S. laws change in a way that allows Canopy to enter the U.S. market, the relationship with Constellation, which already commands a dominating presence in the U.S. premium beer market, will become even more significant for Canopy.

The case for Cresco Labs

Cresco Labs doesn't have a big equity partner like Canopy Growth does. But it has something that Canopy would love to have: a solid and growing presence in the U.S. cannabis market.

Cresco ranks as one of the largest cannabis operators in the U.S. It has operations in nine states, including its home state of Illinois and the biggest cannabis market of all, California. In total, Cresco owns 25 retail cannabis licenses.

Cresco's sales growth has been impressive. The company reported year-over-year revenue growth of 144% in Q4. That growth was driven largely by Cresco's operations in Arizona, Illinois, and Pennsylvania. A couple of acquisitions in 2019 also helped fuel the company's revenue growth.

Don't expect Cresco's momentum to slack off anytime soon. The cannabis operator projects Q1 revenue of $66.5 million, a huge 216% year-over-year increase. This strong growth will stem largely from Cresco's acquisition of Origin House, which closed in early January 2020.

Cresco is primarily focused right now on building on its successes in Illinois and Pennsylvania, two big and especially fast-growing cannabis markets. It's also busy integrating Origin House's operations and achieving profitable growth in California.

Despite the headwinds caused by the COVID-19 pandemic, Cresco continues to generate positive adjusted EBITDA. CEO Charlie Bachtell remains confident that the company will become cash flow positive in 2020 as well.

Better marijuana stock

My view is that both of these stocks should have great prospects over the long run. But I like Cresco Labs better right now for a couple of reasons. First, Cresco is a lot closer to achieving profitability than Canopy Growth. Second, Cresco's valuation is more attractive.

The second point is especially important. With the acquisition of Origin House, the average analysts' estimate is for Cresco to generate revenue of close to $380 million this year. That's more than Canopy Growth is likely to make. But Canopy's market cap is more than eight times bigger than Cresco's. Part of this big gap stems from cannabis remaining illegal at the federal level in the U.S. Even with this, though, Cresco's valuation looks a lot more appealing than Canopy's.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands and Cresco Labs Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
$2.84 (4.41%) $0.12
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$2.73 (-9.30%) $0.28
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$231.26 (-2.25%) $-5.33

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