Charlotte's Web Holdings (CWBHF 4.22%) and Cresco Labs (CRLBF -3.81%) 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.
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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.
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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.
