Though cannabis stocks have been frighteningly underperforming for the last 24 months or so, the industry itself has been expanding rapidly. If Allied Market Research's estimates are correct, the global cannabis market could reach $149 billion by 2031.
As with any high-growth industry, there's no doubt investing in cannabis stocks today is risky business. However, it also has the potential to make risk-tolerant investors wealthy in the long run with attractive investment options in both the Canadian and U.S. markets.
While the Canadian market is legal at the federal level, unlike the American market, the latter is much larger. Let's take a closer look to see if Aurora Cannabis (ACB), a once-hot cannabis stock, or Cresco Labs (CRLBF), a U.S. multi-state operator (MSO), is a better investment right now.
The case for Aurora Cannabis
The last few years have been difficult for Aurora Cannabis. When demand was high in Canada, the company went on an acquisition spree that subsequently weighed heavily on its balance sheet. Demand-supply imbalances in Canada affected revenue, compounding Aurora's problems.
After repeatedly failing to meet its target of positive EBITDA, the company's recent quarterly results provided a ray of hope. In its fiscal 2023 second quarter, it finally reported a positive adjusted EBITDA of 1.4 million Canadian dollars. That's a significant improvement over the prior-year period's adjusted EBITDA loss of CA$7.1 million.
Aurora's net revenue increased by 2% year over year to CA$62 million, and grew 20% sequentially. Though the quarterly results appear to be encouraging, there are still some concerns. Aurora has no significant financial partners, unlike its peers, Tilray and Canopy Growth. It has raised capital by diluting its stock, which is not beneficial to shareholders. Aurora will struggle to enter the U.S. market if and when federal legalization happens unless it has a strong financial backing.
Aurora's path will not be easy unless the company generates profits and achieves positive cash flow.
The case for Cresco Labs
Despite not being a big name in the U.S. cannabis industry, Cresco Labs is slowly gaining traction through its nationwide network of 57 stores.
But Cresco is about to get bigger after completing the acquisition of Columbia Care. The acquisition should close at the end of Q1 2023 and will add another 130 dispensaries to Cresco's portfolio. Merging with Columbia may push it to the forefront of the industry as competition heats up. Each of its fellow MSOs, Trulieve Cannabis, Curaleaf Holdings, and Green Thumb Industries, have over 100 locations each in key cannabis markets.
It is also focusing on long-term profitability by closing underperforming facilities to save money. According to management, this strategy had a significant impact on its most recent quarterly results. Adjusted EBITDA dropped to $42 million in the third quarter, down from $56 million in the year-ago period, while revenue fell 2% to $210 million.
But even with just 57 stores nationwide, Cresco managed to generate $822 million in revenue in 2021, a respectable result compared to bigger players. Last year, Trulieve Cannabis earned $938 million in revenue, while Curaleaf earned $1.2 billion.
New markets could help Cresco's revenue grow even more this year. The company may benefit from the legalization of recreational cannabis in Pennsylvania, Ohio, and Florida. Although none of those states have legalized recreational marijuana yet, there has been progress. Cresco currently operates 11 dispensaries in Pennsylvania, five in Ohio, and 22 in Florida. The acquisition of Columbia will result in more stores in each of these states.
Cresco is trading at 0.61 times sales which is probably undervalued. However, with such growth drivers in place, it seems poised to recover at a certain point in the future.
If cannabis is legalized in the U.S., not all businesses will benefit. Only financially secure and stronger businesses like Cresco will be able to thrive in the long run.
When given a choice between these two, Cresco Labs seems a better buy. This MSO has stronger fundamentals than Aurora Cannabis. Cresco is already profitable and commands a significantly larger market share in the U.S.
Analysts on Wall Street believe Cresco's stock is a buy, with potential upside of 224% over the next 12 months. Aurora, on the other hand, has a consensus hold rating and 18% potential upside over the same period.
If the U.S. federally legalizes cannabis, domestic growers like Cresco will have an advantage. On the other hand, Aurora lacks a strong financial backer to help it establish a position in the U.S. market. It will take a while for Aurora to capture the burgeoning U.S. market, given the intense competition.