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Better Marijuana Stock: Curaleaf vs. Canopy Growth

By Keith Speights – Oct 16, 2020 at 6:14AM

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Which stock wins in a matchup between two of the biggest cannabis companies in North America?

For a while, Canadian cannabis companies received practically all the limelight. As a result, Canopy Growth (CGC -7.01%) emerged as one of the most well-known players in the cannabis industry. It also grew to become the biggest cannabis stock based on market cap. 

U.S.-based cannabis companies for the most part haven't enjoyed as much attention from investors. That's changing now, with Curaleaf Holdings (CURLF -1.15%) stepping to the forefront. 

So far this year, Curaleaf's shares have soared more than 40% while Canopy stock has slipped more than 10%. But which of these two marijuana stocks is the better pick now?

Cannabis leaf on top of a stack of $100 bills

Image source: Getty Images.

The case for Curaleaf

Curaleaf ranks as one of the largest vertically integrated multi-state cannabis operators in the U.S. The company currently operates 95 cannabis dispensaries in 23 states. It runs 22 cultivation sites and more than 30 processing facilities. 

Business has been absolutely booming for Curaleaf. The company reported record revenue (including revenue from managed entities) in the second quarter of $121.4 million, up 120% year over year and 16% quarter over quarter. It's not quite profitable yet, but its bottom line is moving in the right direction. Curaleaf also already consistently generated positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). 

There's no question that Curaleaf will continue to grow in the near future. Its recent acquisitions of Chicago-based Grassroots and Arrow Alternative Care, which has dispensaries in Connecticut, make growth a certainty. 

Curaleaf has several organic growth opportunities as well. In particular, the company has opportunities in the medical cannabis markets in Florida and New York and the recreational marijuana market in Massachusetts.

The outcome of the U.S. elections in November could greatly improve Curaleaf's prospects. Arizona and New Jersey appear to be on track to voting to legalize recreational marijuana, a move that would open up two new big markets for Curaleaf to target.

It's also possible that the U.S. presidential and Senate elections could pave the way for changes to federal marijuana laws. This could greatly expand Curaleaf's addressable market. It could also enable the company to list its shares on a major U.S. stock exchange, which would almost certainly be a major positive catalyst for the stock.

The case for Canopy Growth

Canopy Growth is a leader in the Canadian cannabis industry. It also stands as arguably the strongest Canadian cannabis producer from a financial standpoint thanks to the cash it has received from investments by large beverage company Constellation Brands

Like many of its Canadian peers, Canopy remains unprofitable. However, the company has cut spending significantly, and its quarterly loss narrowed in the second quarter. Canopy's net revenue is also growing, up 22% quarter over quarter in Q2. 

Several acquisitions over the last couple of years have helped fuel Canopy's revenue growth. The company also continues to benefit from increased demand for its medical cannabis products in Canada. However, Canopy still faces headwinds in the Canadian recreational marijuana market with a restricted retail operating environment due to the COVID-19 pandemic and pricing pressure due to increased competition for dried flower products.

Still, though, the Canadian recreational market presents a great opportunity for Canopy. In particular, the cannabis derivatives market -- also known as Cannabis 2.0 -- is still only in its early stages. Canopy is well positioned in this market with its cannabis-infused beverages and edibles.

Europe is another potential growth driver for Canopy. The company is a major player in the German medical cannabis market. It also is a leader in producing cannabinoid compounds including dronabinol thanks to its acquisition of Germany-based C3.

Canopy Growth already competes in the U.S. hemp-based products market, but because of federal cannabis laws, it can't enter the U.S. cannabis market and retain its listing on the New York Stock Exchange. However, the company's option to acquire U.S.-based Acreage Holdings puts it in position to quickly enter the U.S. should cannabis become legal at the federal level. Canopy and Acreage are also partnering to launch cannabis-infused beverages in the U.S.

Better marijuana stock?

Curaleaf is a lot closer to profitability than Canopy is. It has a more well-defined path to generating growth without relying on U.S. marijuana legalization. It's the more attractively priced stock, with Curaleaf's shares trading at 12 times sales compared to Canopy's price-to-sales multiple of 20. 

Both of these companies could have strong long-term growth prospects. My view, though, is that Curaleaf is clearly the better pick over Canopy Growth. 

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

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