Investing $5,000 in companies that compete in a growing industry like cannabis can be great for your portfolio. Assuming the stocks you buy actually provide a positive rate of return on your five grand, that is. Today, I'm going to discuss two which almost certainly won't.
Neither of the cannabis pure-play competitors are profitable, and both are increasingly indebted amid lackluster growth. Though it's unlikely that bankruptcy is in the near future of either company, you definitely shouldn't take a risk by investing in either of these stocks. Here's why.
1. Aurora Cannabis
Down more than 94% in the last three years, things aren't looking up for Aurora Cannabis (ACB 1.80%).
Despite undergoing a business transformation plan over the last two years that was intended to right-size its production capacity relative to the level of demand in the Canadian market, there has only been 60 million Canadian dollars in cost savings so far. And management expects to only realize an additional CA$20 million in savings by the first half of 2023 for a total of CA$80 million. That won't do much of anything against its trailing-12-month net loss of CA$604.11 million.
Nor will growth be able to save the day, as its quarterly revenue has shrunk by 1.86% in the last three years. To make up for the shortfall between income and expenses, Aurora has been issuing new stock, diluting the value of its shareholders. In the fiscal second quarter of 2022, ended Dec. 31, 2021, it minted shares worth $89.7 million, and management has made clear that further dilution is possible.
In sum, the long shot of a turnaround happening in the next few years isn't enough of a reason to buy this stock when there are better alternatives out there. But, if growth accelerates -- which it hasn't so far -- the picture may change. So, if you're a deep-value investor who's comfortable with scraping the bottom of the barrel, it might be worth keeping an eye on Aurora.
Tilray (TLRY 4.97%) claims to be Canada's largest marijuana company, though it also has a significant presence in the German medicinal cannabis market. With trailing revenue of $589.31 million, it also has a claim to being one of the world's leaders in the cannabis space. Unfortunately, none of those things make it a good investment, which I happen to know firsthand as a former shareholder.
Still, Tilray is a significantly stronger business than Aurora. Its quarterly revenue has risen by nearly 44% in the last two years, and its quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA) have expanded by 72.2%. But its total expenses have ballooned by more than double in the same period. As a result, its gross profit margin has fallen, which means that it'll take the company even longer to reach a positive net margin.
Furthermore, Tilray's recent diversification into craft beer hasn't exactly juiced the stock. Its beer-selling subsidiary, SweetWater Brewing, brought in less than $14 million in the most recent quarter, accounting for only 9% of the company's revenue. In contrast, distribution operations accounted for 44% of revenue, which is even more than the 38% derived from selling cannabis.
In other words, for a cannabis business, Tilray sure does a lot of things that don't involve selling marijuana products to consumers. And it isn't as though those non-cannabis activities are powering growth on the bottom line. Nor will the anticipated $20 million in cost synergies left to be realized from last year's merger with Aphria make much of a difference. After all, Tilray's trailing net losses are in excess of $275 million.
While Tilray probably has a better chance of making a recovery than Aphria, there's really no reason to invest in it unless you're especially daring. Once its margin starts to improve, however, there just might be an opportunity.