When you're browsing for growth stocks to invest in, sometimes it's best to leave the stuff you see in the bargain bin for someone else to buy. As the legendary Warren Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
And that's just as true when you're considering a beaten-down business at a dirt-cheap price; there's no substitute for quality. Let's take a peek at a pair of popular growth stocks in the cannabis industry to see exactly how true Buffett's advice can ring.
1. Tilray Brands
Considering Tilray Brands' (TLRY 0.29%) rock-bottom valuation, it's easy to see why bargain-hunting investors might be tempted to buy a few shares. Its price-to-sales (P/S) ratio is around 2.3, which is quite a bit lower than other multi-state operators like Curaleaf, Sundial Growers, and Canopy Growth, to name just a few. But the company's continual struggle to grow and position itself for potential cannabis legalization in the U.S. doesn't paint a pretty picture about its future returns.
First, over the last three years, Tilray only grew its quarterly revenue by around 60.9%, reaching above $151.8 million in the most recent three-month period. That's not the trajectory of a rapidly growing company that is exploiting the cannabis gold rush, to say the least. In the same period, its stock has fallen by around 92.6%, and its total expenses have sharply increased as a share of quarterly revenue. Likewise, rising expenses indicate that its long-standing plans to dominate the medical cannabis market in the E.U. by spinning off tariff-exempt and low-cost manufacturing facilities in Portugal are floundering.
Furthermore, it's unclear how Tilray will be able to trim costs without simultaneously destroying revenue, given that it's engaged in several different lines of business without much overlap. Its beer brewing subsidiary and its non-intoxicating hemp-based food brands don't have much in common with its medicinal and recreational marijuana products segments, as by their nature, their inputs, processing methods, packaging, and distribution channels are all entirely different. So unless management is content to allow revenue growth to plod along while expenses rise, something needs to change -- and that's what makes Tilray a very risky stock to invest in, even if it's dirt cheap.
2. Aurora Cannabis
Like Tilray, Aurora Cannabis (ACB -0.38%) has a P/S multiple of near 1.5, making it even cheaper in comparison to other major cannabis operators. It's unprofitable, but it claims to be the top-grossing Canadian medicinal cannabis company, and it also has a significant footprint in the EU, which may not be doing it any favors. And, to make its similarities to Tilray even more pronounced, its expenses are getting larger and larger compared to its quarterly revenue, all while its quarterly sales have shrunk by more than 44.8% over the last three years, arriving at a scant $39.8 million in quarterly revenue most recently.
Aurora also has a habit of issuing a lot of new stock to raise funds and finance acquisitions, which leaves shareholders at a persistent risk of getting diluted. On June 1, it closed its latest round of bought deal financing for $172.5 million in units comprised of one share and one warrant. Until the company becomes profitable, the risk of dilution will remain high.
Management holds that Aurora will reach an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) run rate before the close of the first half of its 2023 fiscal year. The issue is, to accomplish that objective, it might need to continue making cuts to its production facilities, not to mention finding other cost savings that could dramatically reduce its competitive capabilities. Though there's no guarantee that the cuts will fail to move the company toward profitability, the fact is that its revenue has already been declining for years, even amid growing demand for cannabis.
Despite how cheap each share of Aurora Cannabis might be, it's best to stay far away until it can demonstrate a combination of profitability and growth -- a hard standard for any cannabis company to meet.
