Cronos Group (CRON -2.56%) and Canopy Growth (CGC -5.21%) are two highly promising cannabis companies competing in the recreational and medicinal markets worldwide. Surfing a wave of cannabis legalization in the U.S. and elsewhere, Cronos and Canopy are favorites among pure-play marijuana investors and growth investors alike. But these two companies are at slightly different points in their lifecycles -- an important difference when deciding which stock to pick and how long to hold it.
Canopy has a favorable position in several geographical markets. It's attempting to push out new products and expand its production capacity while clamping down on excessive costs during its seemingly endless growth spurt. In contrast, Cronos is fighting to increase its market share while investing in research to secure the future dominance of its leading product segments. Let's take a peek at each company's status to determine which might be a better pick for your portfolio.
Canopy's successful cannabis beverages are pushing boundaries
While it isn't yet profitable, Canopy is a contender for the largest recreational cannabis market share in the U.S. and Canada, and it already has the largest share of the bulk cannabis flower market in Germany. The company is making the most of its strong position, with revenue up 22% in the most recent quarter from the prior-year period. Canopy's medical marijuana business exhibited global sales growth of 54% year over year, an impressive number to say the least, but easily surpassed by its global (sans Canada) recreational cannabis growth of more than 70%.
Canopy's lineup of recreational cannabis-infused beverages, with brands including Tweed, Deep Space, and others, is selling like hotcakes. That top market share explains why the company increased its production volume by more than 100% in July. In the first quarter after Canopy's beverages launched, they earned the company $7 million, rapidly approaching the value of long-running established segments like cannabis oils, which brought in $7.7 million in the same quarter. It also plans to double its output at least one additional time before the end of the year.
This is good news because it will solve one of the company's persistent issues: retail locations running out of stock of in-demand products. Strong consumer demand is validating Canopy's approach to developing new cannabis products. In the long-term, Canopy's beverage sales will also benefit from the company's relationship with Constellation Brands, (STZ 1.32%) an alcoholic beverage company that invested $245 million in Canopy in exchange for a 9.9% stake in 2017. Given that Constellation owns wildly successful mainstream beverage brands like Corona and Modelo, it's possible that Canopy's cannabis beverages could see equally wide distribution in the future, if local laws allow.
Canopy still has some work to do before it can achieve profitability and reward its early investors. To reduce costs, the company has been laying off employees and closing extraneous cultivation facilities, including a farm in Colombia. Canopy is also working on curbing its selling, general, and administrative (SG&A) costs for the long term, and its free cash flows are improving over time as a result. Compared to the same quarter last year, Canopy's most recent free cash flows were up by 51%, though the company still bled $180 million in cash.
Will Cronos's partnership with Altria pay off?
At the moment, Cronos's business is predominantly in Canada, though its American and Israeli segments are growing quickly. While its Canadian segment hasn't expanded much this year, its total quarterly revenue is growing at a rate of 29.1% year over year, which is a bit faster than Canopy. But this growth doesn't change the profitability problem. That said, Cronos may not need to take dramatic action to reach profitability, thanks to a powerful new ally.
In March of last year, Altria Group (MO 0.04%) agreed to invest $1.8 billion in Cronos in exchange for a 45% share of the company. Altria is one of the world's largest tobacco product manufacturers, and its holdings include everything from major cigarette brands to newly famous e-cigarette and vaporizer companies like JUUL. So it's reasonable to expect that Altria will empower Cronos with its considerable strength in product development, brand-building, and supply chain management. As long as Altria continues to invest in improving its vaporizers, Cronos will benefit, and it will have a long-lasting competitive advantage as a result.
Cronos is expanding its production capacity by creating new international cultivation centers. Its new facilities in Colombia, Canada, and Israel will help it to meet demand as soon as the end of this year, but they could also swell the company's overhead costs and keep it from reaching profitability in the short term.
It's important to note that even with the help of Altria, Cronos still doesn't have any cannabis beverage products on the market, so it isn't directly competing in the same segments as Canopy. In other words, it's entirely feasible for both stocks to be favorable investments over the next few years, especially if cannabis legalization creates new market opportunities. At the same time, to choose between the two stocks, it's important to recognize that Altria's involvement is a massive vote in Cronos's favor.
So, while Canopy is much closer to becoming profitable and is taking active steps to get there soon, Cronos doesn't necessarily need to become profitable anytime soon because it can lean on Altria. Thus, while it's a close call, in the long term I think Cronos will probably leverage Altria's capabilities to grow more rapidly, even if Canopy may perform better sooner.