If you're looking for a cannabis investment, you're doubtlessly familiar with SNDL (SNDL -4.00%), formerly known as Sundial Growers, and Tilray Brands (TLRY -2.20%) -- two of the industry's top competitors. After spending much of 2021 in the limelight as meme stocks, the pair went on to badly underperform the market this year, with Tilray falling by 33% while SNDL's shares are down by as much as 46%. 

Regardless of shareholders' lamentations, there's a good chance that both enterprises will grow by quite a bit over the next few years, which makes now a smart time to invest in one or the other. But, the answer to the question of which stock is a better buy is somewhat in the eye of the beholder. 

These peers have a lot in common, for now

Tilray and SNDL primarily compete in Canada's cannabis market, and both are among its largest players by revenue. They also both produce alcoholic beverages, with Tilray's Sweetwater Brewing subsidiary selling craft beer in the U.S., and SNDL's Alcanna chain of liquor stores serving Canada. But where Tilray's aspirations include an entry into the U.S. recreational cannabis market after federal legalization takes place (assuming that it eventually does) and plans to dominate in the European Union's medicinal and recreational cannabis markets, SNDL seems to be content with limiting its participation in foreign markets to investments in U.S.-based marijuana businesses via its SunStream Bancorp division.

Put more generally, SNDL's strategic plans are focused around consolidating its position in Canada by acquiring smaller competitors in alcohol and marijuana, whereas Tilray plans to keep spreading out its operations globally. If Tilray's expansion plans work out, it'll have a dramatically larger addressable market than SNDL, and any market share losses in its Canadian cannabis operations will easily be compensated for by growth in markets like Germany and Italy.

On the other hand, SNDL's concentration in Canada means that it'll likely have an easier time refining its operations to become profitable sooner, as it won't have to be concerned with adapting to different regulatory regimes or moving its business and staff across the Atlantic.

So far, neither company is profitable. While SNDL's quarterly gross margins have improved significantly over the last three years, Tilray's margins have remained roughly the same. In the third quarter, SNDL's revenue was up by 1,500% year over year, largely as a result of sales bolted on from its acquisition of Alcanna. On the other hand, Tilray's revenue was flat over the same period. Still, Tilray's dreams are much bigger than SNDL's, even if its progress toward them appears to be proceeding much more slowly.

A tale of two valuations

Now that we're up to speed on how these two companies are expecting to compete over the next few years, let's take a look at how their stocks compare in terms of valuations:

SNDL PS Ratio Chart
Data by YCharts.

SNDL is significantly cheaper on both a price-to-sales ratio and an enterprise-value-to-sales ratio basis. Tilray's price-to-book ratio is slightly lower than SNDL's, but it's hardly a blowout. In a nutshell, what these metrics mean is that shareholders get more revenue for their investment dollars with SNDL stock and that its valuation is less expensive than Tilray's when taking the debt and cash that both companies have into account. Furthermore, each of these businesses is trading for less than the value of its tangible assets, which means that shareholders wouldn't lose money in the extremely improbable event of bankruptcy.

There's more to their stories, though than the direct comparisons of a few metrics. If, for example, the market were bearish on SNDL because it's expected to generate earnings or sales at a slower pace than Tilray, that would explain its cheaper valuation. But that isn't the case whatsoever. 

These companies aren't going to grow at the same rate

Based on an average of estimates compiled by Wall Street analysts, SNDL will bring in roughly $711.9 million in the next fiscal year, whereas Tilray will have revenue of around $959.3 million. But for Tilray, that only equates to top-line growth of around 13.2%, whereas for SNDL, analysts expect growth of 38.7%.

So why would investors want to buy shares of Tilray when they would be getting less bang for their buck and the business is likely to be growing its sales at a dramatically slower pace in the near term than its smaller peer?

The answer is that the chances look strong for federal marijuana legalization to be enacted in the U.S. and also in the E.U. at some point in the next few years, and at present SNDL, cannot benefit from either market. Tilray, by contrast, is positioned explicitly to take advantage of those changes that occur, even if it might take a while. 

Thus, if your preference is for a stock with greater growth potential over one that offers better value today, Tilray seems the better buy, though it faces substantial risks stemming from its distributed global operations. On the other hand, SNDL is priced inexpensively at the moment, and that makes it likely the better option overall, especially as its focus on Canada's regulated goods markets is a lower-risk proposition in the long term.