Just about all growth stocks were hammered this year. But the story goes back earlier with cannabis stocks. Since they peaked in the first quarter of 2021, the lack of favorable momentum toward U.S. federal legalization has taken a major toll on their stock prices. Even steady sales growth in the last few quarters has failed to impress investors.
But these companies are growing revenue at a healthy rate that could make them top cannabis players by the time U.S. federal legalization happens.
According to GlobeNewswire, the global pot industry could grow from roughly $26 billion in 2021 to a value of $149 billion by 2031. So the optimistic view is that the market now is ideal for long-term investors to pounce on the following two growth stocks at beaten-down prices. These businesses are growing despite the legal status of cannabis.
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1. Tilray Brands
The 2021 merger of two strong Canadian cannabis companies to form Tilray Brands (TLRY -2.52%) is proving rewarding. Tilray has a stronghold in the Canadian cannabis market, and Europe could be a significant growth engine, with its operations in Germany, France, Luxembourg, Italy, Poland, and Portugal.
Tilray's German subsidiary, CC Pharma, generates 90% of its distribution revenue. In fiscal 2022, distribution revenue accounted for 41% of total revenue. According to management, Tilray dominates the medical marijuana sector in Germany with a 20% market share.
These factors most likely contributed to Tilray's net revenue of $628.4 million in fiscal 2022, a 22% increase over the previous year. Its Canadian cannabis sales surged year over year, but recreational revenue dipped slightly.
Its fourth-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $11.5 million represented the 13th consecutive quarter of positive adjusted EBITDA. Its peers Aurora Cannabis and Canopy Growth are still trying to generate positive EBITDA.
Tilray is also better positioned to develop in the U.S. market than its peers because of its SweetWater Brewing, Breckenridge Distillery, and Manitoba Harvest acquisitions, which are all EBITDA profitable. Tilray's management is now aiming for $4 billion in yearly revenue by the end of fiscal 2024. Much of this growth is reliant on the U.S. market, which CEO Irwin Simon believes to be a "$100 billion opportunity."
Simon also believes that U.S. legalization will happen -- the question is when. But that might take years. So to meet this aggressive revenue target, Tilray might need to explore other markets or purchase other cannabis businesses.
Recently, Tilray formed a strategic collaboration with Hexo (HEXO) to repay Hexo's $173 million convertible debt. In exchange, it received the right to purchase a significant share in Hexo at a later date. Hexo will pay 5% yearly interest on the loan, as well as $18 million in annual advisory services.
Tilray can also purchase Hexo at a later date if it seems appropriate. As the industry grows, taking out the competition can be a wise move on Tilray's part. If all of the company's strategies fall into place a few years down the line, it is capable of becoming a global cannabis giant.
2. Curaleaf Holdings
While Tilray might be the only Canadian pot stock to invest in now, the U.S. cannabis industry is brimming with rising stars. One such company is Massachusetts-based Curaleaf Holdings (CURLF). Curaleaf has thrived on timely and strategic acquisitions that have resulted in consistent exceptional performance each quarter.
Acquiring cannabis operators and brands like Select, Arrow, Curaleaf NJ, Blue Kudu, Alternative Therapies Group, Remedy, Grassroots, and more over the last few years has worked out well for it. Some of these acquisitions are yet to reach their full potential.
It has earned $1.2 billion in trailing-12-month revenue, the highest in the industry. Curaleaf also targets limited-license markets, where state regulators are selective in allocating licenses. This has allowed Curaleaf to set up a loyal consumer base in these key states; it presently has 135 dispensaries in 19 states.
These factors probably led to another strong quarter. Curaleaf's revenue came in at $338 million in the second quarter, up 8% year over year. Adjusted EBITDA increased 2% year over year to $86 million in the quarter.
The company has expanded its European footprint with the acquisition last year of EMMAC Life Sciences Group. Rebranded now as Curaleaf International, its revenue surged 50% year over year in the second quarter. Management believes Europe is the next big opportunity with an estimated market of $229 billion.
It plans to complete the purchase of Tryke Companies by the third quarter, which will contribute about $20 million to total revenue in the following quarter. This acquisition will strengthen Curaleaf's roots in three key growing markets: Utah, Arizona, and Nevada.
The company aims to meet its revenue target of $1.4 billion to $1.5 billion for the full year, thanks to the expanding U.S. and European markets.
TLRY revenue (quarterly). Data by YCharts.
Tremendous growth ahead for the industry
Despite inflation fears gripping the market, both companies are expanding rapidly. The cannabis industry is one of the fastest growing in the world. Both stocks are down more than 50% from their 52-week high, but when the industry matures, these stocks will be costly. Wall Street analysts recommend Curaleaf stock as a strong buy, with a 56% upside potential. Meanwhile, Tilray gets a hold rating with a 51% upside potential in the next 12 months.
But as an evolving industry, pot also carries risk. Long-term investors will benefit from a diversified portfolio of cannabis stocks and stocks from various other industries.
