With a slew of states and countries legalizing marijuana in the last few years, the cannabis sector is expanding rapidly, and that means there are plenty of opportunities for investors to find the growth stocks that will lead the industry tomorrow. But many marijuana operators are fighting to retain their market share, and only a few are positioned for success.
On that note, Aurora Cannabis (ACB -6.81%) and Trulieve Cannabis (TCNNF -6.26%) are both unprofitable marijuana companies that are facing stiff downward pressure on their top lines. Which is a better option as a growth investment?
Aurora has a long way to go before stabilizing
Investing in Aurora right now means believing that the company will eventually succeed in its ongoing multiyear turnaround plan to scale down its business and become profitable in the process.
That's not exactly a strong investment thesis for a growth stock, but in Aurora's case, there are a few signs that point to such a thesis being credible, and if it can survive in the near term, it could later experience robust growth.
In the last three years, its quarterly revenue fell by 31.2%, reaching just over $37.7 million. But it retained its position as Canada's biggest medical marijuana business. On Jan. 4, it closed the sale of one of its cultivation facilities, thereby trimming its overhead while also curtailing its production capacity even further.
Believe it or not, that supports the company's long-term health. Cutting unprofitable facilities is a big part of why its total expenses fell slightly as a percentage of quarterly revenue in the last three years, bringing it closer to profitability in the process.
For the moment, Wall Street analysts expect it to make $150.7 million in sales for 2023, which is less than its trailing-12-month total revenue of $164.8 million. If it can continue cutting costs long enough to break even, it might eventually be able to leverage its favorable positioning in lucrative international medical-marijuana markets like Germany and the U.K., where it's already operating.
That's likely part of the reason analysts expect it to bring in revenue of $207.3 million in 2024 as it returns to growth. Cannabis legalization in its markets would also give investors exposure to some additional upside, as the company could eventually get around to expanding its footprint once it rightsizes its Canadian operations.
Trulieve's scale-up is in full swing
Trulieve Cannabis is a better growth stock than Aurora because it plans to keep growing aggressively while consolidating its position within its markets, instead of trying to scale down to burn less money. But the investing thesis in its favor isn't as cut and dried as it might seem at first glance.
It primarily competes in U.S. cannabis markets, where it sells both medical and recreational products, depending on the state. Since three years ago, its quarterly revenue has popped by 213.1%, reaching nearly $300.8 million, and it was even profitable for a handful of quarters consecutively in that period.
In the third quarter, it opened 11 new dispensaries across the U.S., suggesting that management is comfortable with both the level of demand in the market as well as its ability to return to profitability in the near term.
In particular, Trulieve's 123-store presence in Florida makes it appealing, since there aren't any competitors that have as large a retail footprint in the state. Cornering a market where the number of marijuana cultivation and sale licenses is limited means creating a semi-monopoly that could deliver returns to shareholders for years to come.
But Trulieve's revenue growth appears to have hit a plateau in the third quarter, the third period in a row when its sales failed to post strong quarter-over-quarter growth. That means declining year-over-year sales could be on the docket for its earnings report (expected for late March or early April), which might damage its share prices sharply. You may be wondering how management can expect growth and new-store openings while its existing stores are clearly seeing demand slacken.
The answer is that it might well be making the same mistakes with overbuilding capacity that Aurora Cannabis did in the Canadian market just a few years prior. If that's the case -- and falling marijuana prices in the U.S. in 2022 support the idea that it is -- Trulieve investors could soon be in for a rude awakening when the company's extensive cultivation facilities and large retail footprint are suddenly big money-burners.
What's the best move?
Even if Trulieve is about to hit the same major headwinds that Aurora hit a while ago, it could still grow faster. Its problems with a lack of profitability are relatively new, and they aren't as severe as Aurora's.
Plus, the U.S. cannabis market is far larger than the Canadian market, so Trulieve won't need to expand internationally to keep adding to its top line. Trulieve can just continue to develop its regional hubs in the Southeast and the Northeast, both of which are likely to be energized by a new wave or marijuana legalization that's nowhere to be found in Canada.
Nonetheless, you should understand that both of these growth stocks are quite risky at the moment. If you can't accept the chance that Trulieve's next year or so is going to be a bumpy ride for shareholders, it's better to steer clear, even if it'll be a better bet than Aurora Cannabis.
