Cannabis company Sundial Growers has been on fire lately. Its stock price has skyrocketed 122% in the past three months, even after a big recent pullback. If this meteoric rise was due to the pure potential of company's business and its growth prospects, it might have been worth considering purchasing its shares.
But Sundial's recent good fortune on the market is due in large part to an army of traders from Reddit's r/WallStreetBets attempting to pull off another short squeeze. And as we learned from the GameStop fiasco, for long-term investors, it's typically best to stay out of the fray.
Fortunately, there are much better options for those looking to get in on the cannabis industry's growth. Two of the most attractive stocks today are Curaleaf Holdings (CURLF 0.50%) and Cresco Labs (CRLBF -5.31%).
1. Curaleaf Holdings
While some cannabis companies chose to focus their attention on one or two markets in the U.S., Curaleaf decided to cast a wide net across the country. The company's footprints span an impressive 23 states and 101 dispensaries.
A notable state where Curaleaf does business is Florida, where the medical use of cannabis is legal. Curaleaf holds a third leading market share in the Sunshine State. Meanwhile, the pot grower holds a leading market share in New Jersey and the second leading spot in Arizona, two states where voters and legislatures recently opted to legalize the recreational use of cannabis.
These markets are projected to grow rapidly in the coming years. In Florida, the legal marijuana space will expand at an estimated compound annual growth rate (CAGR) of 25.3% through 2025, when it will be worth $2.6 billion (up from $671 million in 2019). In Arizona and New Jersey, the cannabis market will grow at a CAGR of 13.8% and 52.1% through 2025, respectively.
And these represent only a fraction of the company's addressable population. Clearly, Curaleaf's wide-net strategy has its perks, which is also evident when looking at its financial results. During its third quarter ending Sept. 30, the company reported total revenue of $182.4 million, representing a year-over-year increase of 195%.
The company posted a gross margin of 50% (compared to 47% in the third quarter of its previous fiscal year), and its net loss of $9.3 million wasn't that much worse than the net loss of $6.8 million it reported during the prior-year quarter. Investors would do well to ignore the red ink on the bottom line for now, however.
The U.S. cannabis market is one of the largest in the world and is poised to continue on its upward trajectory, even if marijuana isn't legalized at the federal level in the short term. Thanks to its wide-reaching presence in the country -- and its solid market share in many U.S. states -- Curaleaf is ideally positioned to profit from this industry's growth.
2. Cresco Labs
Cresco Labs is also a multistate operator, although it has a presence in only nine states compared to Curaleaf's 23. But that metric doesn't tell the whole story. Arguably the best opportunity that presents itself to Cresco Labs is in the state of California. In January 2020, the company closed its all-stock acquisition of Origin House in a transaction valued at $428.2 million.
Thanks to this deal, Cresco Labs now boasts an impressive presence in the Golden State, where the company now sells its products in more than 575 dispensaries. Recreational uses of cannabis are legal in California, and it is the largest U.S. state by population. In California, the marijuana segment is projected to be worth about $7 billion in 2025, up from $2.9 billion in 2019.
Cresco Labs also has a notable presence in states such as Illinois -- where recreational and medical uses of cannabis are legal -- and Ohio, where medical uses are allowed. As the cannabis market grows in the U.S., Cresco Labs is also well-positioned to cash in, as it does business in six of the 10 most populous states in the country.
Along with Cresco Labs' financial results, these prospects explain its stock performance over the past year. During its third quarter ending Sept. 30, the company reported revenue of $153.3 million, representing a year-over-year increase of 323.4%.
Its gross profit margin did drop slightly to 55.2%, compared to 57.6% during the third quarter of 2019. But Cresco Labs reported a net income of $4.9 million, which was much better than the $8.6 million net loss it recorded during the year-ago period.
The increasingly positive attitude toward cannabis products will be a key growth driver for Cresco Labs moving forward. If the company can keep executing and delivering strong financial results as it has recently, its shares will continue delivering market-beating returns, making it a relatively safe cannabis stock for the short and long term.