The cannabis industry is experiencing rapid growth. According to Allied Market Research, if estimates are correct, it could be worth $149 billion by 2031. Despite this, investors remain hesitant to invest in this industry due to the drug's illegal status at the federal level in the United States.
While there's little doubt that investing in this industry carries risk, as with any high-growth industry coupled with an uncertain regulatory outlook, it has the potential to make investors wealthy.
Investors with a high appetite for risk have quite a few options in this industry. While Canadian pot stocks have a legal market to grow in, the market is modest compared to the U.S. Meanwhile, U.S. cannabis stocks continue to defy expectations even in a limited state market. With that background, let's take a closer look to see if Canada-based Tilray Brands (TLRY -0.58%) or U.S. multistate operator (MSO) Cresco Labs (CRLBF -1.00%) is a better investment option right now.
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The case for Tilray
Tilray has benefited greatly from its mega-merger with Aphria. For 14 consecutive quarters, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have been positive. Its adjusted EBITDA for its recent first quarter of fiscal 2023 also came in positive at $13.5 million. However, demand-supply imbalances in Canada resulted in a 9% decrease in revenue to $153 million. Net loss also widened to $66 million from $34 million in the year-ago quarter.
Management still remains confident that it will meet the $70 to $80 million adjusted EBITDA target and be free-cash-flow positive for the fiscal year ending May 31, 2023. Tilray also intends to generate $4 billion in revenue annually by the end of fiscal 2024. The company has high hopes from the cannabis market in the United States.
With the acquisitions of SweetWater Brewing, Breckenridge Distillery, and Manitoba Harvest, it is well-positioned to enter the U.S. market. However, the American cannabis market remains a long shot until legalization happens. For the time being, it must concentrate on its Canadian and European operations to boost revenue.
The case for Cresco Labs
Cresco Labs has 54 cannabis dispensaries across the country. In fiscal 2021, it earned $822 million in revenue. It is impressive that Cresco was able to achieve this revenue growth despite having fewer stores than its peer Trulieve Cannabis, which operates 171 stores nationwide and earned $938 million in revenue in fiscal 2021.
Cresco's strategy of targeting limited-license markets could be credited. Because cannabis remains illegal at the federal level, state regulators are cautious about the licenses they issue. This strategy has helped Cresco garner a loyal customer base.
Its third-quarter revenue fell 2% year on year to $210 million. From an operational standpoint, the company has been consistently profitable. However, adjusted EBITDA fell to $41 million from $56 million in the prior-year quarter. Management blamed the decline on actions taken to focus on long-term profitability. These strategies included the closure of a few underperforming facilities as well as inventory adjustments.
Cresco recently acquired Columbia Care, another rising cannabis company. The transaction, which is expected to be completed by the fourth quarter of this year, will add 130 dispensaries to Cresco's portfolio. This acquisition would be extremely beneficial to the company as the American cannabis market continues to expand. Cresco had $130 million in cash at the end of the third quarter, which should help it meet its expansion targets for this year.
Which is a better cannabis investment?
Though both are good cannabis stocks to buy and hold for the long term, I would go with Cresco Labs. When it comes to fundamentals, this MSO is far superior to Tilray. While Tilray is the larger company by market capitalization following its merger with Aphria, it still has a long way to go. A merger of this magnitude takes time to realize its full potential. Furthermore, should federal legalization happen in the U.S., domestic companies like Cresco will have the upper hand in growing their business. Given the intense competition, it could take some time for Tilray to thrive in the American cannabis market.
Cresco is already profitable and has a much larger market share in the United States. Street analysts are rating Cresco's stock as a buy, with a potential upside of 130% over the next 12 months. Tilray, on the other hand, has a consensus hold rating, with a possible upside of 18% over the same period.
