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Better Cannabis Stock: Charlotte's Web or Cresco Labs?

By Zhiyuan Sun – Sep 19, 2020 at 7:07AM

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Everyone is talking about these two promising marijuana companies. Which one is the better buy?

Charlotte's Web Holdings (CWBHF -8.06%) and Cresco Labs (CRLBF -0.53%) are two companies getting a lot of attention in the marijuana sector after their recent earnings releases. The former is a market leader in the Canadian CBD hemp oil industry that may be on the brink of a turnaround. The latter is a U.S. pot producer experiencing skyrocketing sales in its wholesale and retail store segments.

While one is a value stock and the other is a growth play, both companies share the potential to reward investors for the long term. Today, let's take a look at which of the two cannabis stocks is the better buy

Woman comparing two options, A and B.

Image Source: Getty Images.

The case for Charlotte's Web 

Charlotte's Web's revenue took a devastating hit in the second quarter of 2020. That's because it relies on more than 21,000 brick-and-mortar retailers to sell its CBD products, and those locations were largely shut down as part of coronavirus containment measures. This meant that about 72% of the company's revenue came from e-commerce in the three months ended June 30. 

For the quarter, revenue declined to $21.6 million from $25 million back in Q2 2019. Even though Charlotte's Web still recognized a 64.8% gross margin, the company posted an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $5.7 million. Operating expenses went through the roof as Charlotte's Web made capital investments in acquisitions and capacity expansion despite a decline in sales.

There's a light at the end of the tunnel, however. Charlotte's Web recently completed its acquisition of Abacus Health, a company specializing in manufacturing over-the-counter marijuana-derived medications. With stores reopening as COVID-19 cases become more manageable in many areas, Charlotte's Web is now seeing its sales for the third quarter trend above Q2 levels.

Pot plants in a greenhouse.

Image Source: Getty Images.

The case for Cresco Labs

During the second quarter of 2020, Cresco Labs' marijuana revenue more than tripled year over year to $94.3 million as the company began scaling its operations in key U.S. markets such as Illinois and Pennsylvania. The company recorded a 73.7% gross margin on top of its sales and generated $16.5 million in adjusted EBITDA, an increase of 419% from the first quarter of 2020.

Cresco Labs is on the path to breakeven, with its operational cash use narrowing from $40.1 million in Q1 2020 to $9.9 million in the quarter ended June 30. The company is doing well managing its financial health, with $71 million in cash on its balance sheet and $737 million in terms of assets minus liabilities.

Which stock is the better buy?

Currently, Charlotte's Web has a $391 million market cap, while Cresco Labs' market cap stands at $1.2 billion. Despite posting a vast operating loss and suffering revenue declines, Charlotte's Web stock's forward price-to-sales ratio of 4.53 is significantly higher than Cresco Labs' 3. Hence, investors will not only (likely) get a better deal by buying Cresco Labs, they'll also become part-owners of a company that is growing its revenue by triple-digit percentages. On top of that, cannabis investors will be steering themselves clear of the recent havoc in Canadian marijuana markets by investing in a company operating exclusively in the U.S.

Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cresco Labs Inc. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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