So far, 2022 has been a rough year for Canadian cannabis companies like Tilray Brands, (TLRY -1.68%) Aurora Cannabis, (ACB 0.62%) and SNDL (SNDL). Tilray and SNDL are both down by over 59%, and Aurora's shares are performing even worse, losing more than 77% of their value.

Considering that the market-tracking SPDR S&P 500 ETF Trust is only down by around 21.9%, it's no shock that shareholders are second-guessing their investments in these so-called growth stocks, nor is it surprising that potential buyers are hesitating to start new positions. Are any of these three businesses appealing long-term purchases, or are the headwinds they're facing genuine dealbreakers? 

Problems abound, but they're unlikely to be immediately disastrous

The most important thing that investors need to know is that none of these three cannabis companies are profitable, nor is it likely that they will be profitable anytime soon. In fact, with the exception of SNDL, their quarterly gross margins have actually gotten worse over the last three years. Take a look at this chart:

TLRY Gross Profit Margin (Quarterly) Chart
Data by YCharts.

There are a few reasons for the weak performance, starting with the glut of cannabis in the Canadian domestic recreational market.

Since around mid-2019, Canadian cannabis cultivators -- including SNDL, Tilray, and Aurora -- produce far more inventory than they're able to sell. Oversupply drives marijuana prices down and contributes to margin compression. It also forces businesses to invest more in competing for market share, and over the last 12 months, all three have increased their sales and marketing expenses, with Tilray's expenditures rising sharply by 26%.

Worse yet, due to Canada's regulations on marijuana products, many businesses are forced to destroy their excess inventory each year, which effectively confers a sharp penalty on companies whose output is mismatched with demand. In 2021, roughly 26% of domestic cannabis production was destroyed, totaling around 468 tons, and there's not much sign that 2022 will be better. 

In short, these three competitors are facing a bearish operating environment in their home market. As a result, based on a combination of company filings and analyst estimates, SNDL's management expects both SNDL and Aurora to bring in less revenue in 2022 than in 2021, though Tilray's sales are anticipated to grow from CA$728 million to CA$801 million. But the same estimates indicate that, at least for Tilray and SNDL, top-line growth should resume with gusto in 2023. So for those two, there could still be a bit of room to develop a bullish thesis. For Aurora, it probably makes sense to check back on its performance in a couple of quarters to see if its prospects have improved.

Tilray might soon catch a break

Compared to SNDL, Tilray has an important saving grace: It competes in multiple geographical segments and also in multiple product segments. As of Q2, SNDL derives the majority of its revenue from liquor sales in Canada, and its alcohol segment is profitable. Nonetheless, there's nothing that could catalyze rapid growth in its alcohol sales, as alcohol isn't newly legalized in Canada, and people aren't about to start drinking significantly more. That implies it will see more unprofitable growth in its cannabis segment, which might end up burning down its cash reserves while eroding shareholder value along the way. 

Tilray's positioning is significantly more favorable, as it aims to compete in the EU's medicinal marijuana markets and to shape the recent discussions about recreational cannabis legalization there. On Sept. 22, it got a critical authorization from regulators in Italy, enabling it to sell one of its medicinal cannabis solutions in the country. This summer, it also got approval from regulators in Poland to distribute and sell its medicinal products in pharmacies there too.

If recreational cannabis ends up being legalized, Tilray has already emplaced commercial infrastructure in other major EU markets like Germany, and its production facility in Portugal entitles it to tariff-free, intra-EU sales, which is a major advantage. In contrast, SNDL doesn't have anything remotely as lucrative on the horizon. For its part, Aurora has a limited footprint in France via its contract to supply the country's medical marijuana pilot program, and it also has some competitive positioning in the recreational market of Poland and, to a lesser extent, Germany. Of course, legalization in Europe won't solve Tilray or Aurora's unprofitability, but it won't hurt share prices either. 

The only appealing long-term investment of the three is Tilray, but it's a risky purchase. Without any clear timelines for becoming profitable, buying its shares right now means accepting the chance that its stock will continue to drop for a year or two longer, especially if the market's sentiment about growth stocks continues to be negative. Still, there's no company better positioned to take advantage of legalization in the EU, so there's a decent chance it'll be able to keep growing and figure out its profitability issues down the line.