For both Tilray (TLRY) and Charlotte's Web (CWBHF -4.92%), hemp plays an important part in their growth and overall strategy. But that hasn't exactly made them safe buys. Year to date, these stocks are down more than 50% and they're doing much worse than the Horizons Marijuana Life Sciences ETF (HMLSF 6.16%), which is down just 19% thus far in 2020.
Let's take a look at which of these two troubled pot stocks is more likely to right the ship, and which is a better buy today.
Charlotte's Web is hurting for growth
A big reason why Charlotte's Web is struggling to attract investors is the company just isn't generating much growth. The Colorado-based company released its first-quarter results on May 14. And in Q1, revenue topped just $21.5 million -- the lowest it's been since the fourth quarter of 2018 when revenue totaled the same amount.
As of the end of Q1, Charlottes' Web's cannabidiol (CBD) products were in over 11,000 retail doors, but simply being in more locations hasn't translated into revenue growth for the hemp producer. It's been growing its presence over the years and that's why I'm lukewarm about the all-stock deal that Charlotte's Web announced on June 11 to acquire Abacus Health Products. Although it'll give the company access to now more than 21,000 "unique retail doors," it's still a big question mark in terms of how much more revenue that will actually generate for the company.
It would be reasonable to expect that by expanding into more retail locations, Charlotte's Web should sell more products, but that is by no means a foregone conclusion.
To make matters worse, not only is the hemp producer and CBD product maker struggling to grow, but it's also now recorded losses in three straight quarters. Previously, Charlotte's Web looked like a safe bet to be one of the few cannabis companies that investors could count on to turn a profit. That just isn't the case anymore.
Tilray's growing but struggling with deep losses
On May 11, Tilray released its first-quarter results of fiscal 2020. And one of the strong points for the British Columbia-based business in Q1 was that its sales of $52.1 million were up 126% year over year and were an 11% improvement from Q4.
One of the reasons for Tilray's strong growth is that its operations are well diversified. Cannabis revenue of $30.8 million represented 59% of its total sales for the period, while hemp made up the remaining 41%. A year ago, cannabis sales were more than three-quarters of Tilray's total sales. But in 2019, Tilray closed on a cash-and-stock deal worth 419 million Canadian dollars to acquire the largest hemp foods company in the world, Manitoba Harvest.
The greater focus on hemp has given Tilray some excellent diversification. Unfortunately, Tilray's also picked up some additional expenses along the way and in Q1 incurred a net loss of $184.1 million -- up from just $29.4 million in the prior-year period. Tilray posted a loss in each of the last four quarters and the company's growth isn't helping it get closer to profitability.
Back in February, Tilray announced it was laying off 10% of its workers as it looked to get closer to breakeven. And in May, the company said it would close a greenhouse in Ontario, saving it CA$7.5 million annually.
Which stock should you go with?
I'm not convinced that Tilray's cost-cutting moves will result in significant improvement in its bottom line; the losses are just too deep and require much more significant moves. But the acquisition of Abacus Health may not result in strong sales growth for Charlotte's Web, either. Neither of the moves these companies are making is terribly convincing, and I'm not sure if either of their stocks will ultimately be smart long-term buys.
Tilray is more diversified and in better shape to continue growing its sales at a strong rate, but Charlotte's Web is a lot closer to profitability, with a loss of just $11.5 million in its most recent quarter.
To potentially break the tie, let's look at which stock is better priced relative to its revenue:
Unfortunately, there's not a whole lot separating these two cannabis companies, even on their price-to-sales multiples.
Both of these cannabis stocks are risky, but I'll give Tilray the edge in this case. Diversification is important and there's a lot of room for the company to scale back on unprofitable segments and focus on more profitable areas of the business should Tilray decide to be more aggressive in reaching breakeven.
That flexibility could give it a big advantage over its peers. And another quarter of strong sales growth, thanks to that diversification, may be just what Tilray needs to get investors more bullish on its stock this year.