Marijuana stocks have performed poorly over the last two years. But, like any fledging industry, the cannabis industry has its trials.
However, over the long term, the industry has a significant growth runway ahead. Cannabis analytics firm BDSA estimates that global cannabis sales will reach $57 billion by 2026, a 13% annual growth forecast from $30 billion in 2021, with bulk of this growth expected to be driven by the Canadian and American markets. Investment opportunities seem lucrative, and investors with a higher risk appetite might stand to profit handsomely in the long run in this volatile industry.
Canada-based Aurora Cannabis (ACB -3.98%) and Chicago-based Green Thumb Industries (GTBIF 1.68%), a U.S. multi-state operator (MSO), are two of the most popular names in the industry. But let's find out which one is positioned to capture this growth and worth investing in.
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The case for Aurora Cannabis
Aurora Cannabis, once a popular name in the Canadian cannabis industry, has seen some harsh days over the past couple of years. Some of its reckless decisions, such as going on an acquisition spree, have put an immense burden on its balance sheet when these acquisitions bled money.
However, in its most recent quarterly results, the company met its target of becoming EBITDA positive after failing repeatedly in the previous quarters. In its fiscal 2023 second quarter, adjusted EBITDA came in at 1.4 million Canadian dollars, a sizable improvement over the prior-year period's adjusted EBITDA loss of CA$7.1 million.
Unfortunately, EBITDA is not a true measure of profit, and the market wasn't impressed. Overall, Aurora still recorded a net loss of CA$67 million for the quarter. The company is still losing money which is a major point of concern. It spent CA$60.6 million in operating activities in the quarter, higher than it did in the prior quarter.
Aurora spent CA$180 million in cash while raising CA$77.6 million, primarily issuing stock, which doesn't sit well with investors. This is often a sign of tough times given the high interest rate environment and debt finacning was kept at a minimum. Aurora will have a tough time entering the U.S. market if U.S. federal legalization occurs unless it has solid financial support.
Aurora's shares have fallen 99% in value in the last five years. I see no reason for its shares to bounce back anytime sooner unless the company generates profits and positive cash flow.
The case for Green Thumb Industries
U.S. cannabis companies have proven that though federal legalization is important, the state markets can suffice to make them profitable. One such multi-state player is Green Thumb Industries which has quadrupled its revenue from $216 million in 2019 to $1 billion in 2022. Note that this outstanding growth is just from the limited legal state markets.
The company has aggressively expanded from 39 stores in eight states in 2019 to 77 stores in 15 states. Green Thumb has also managed to be consistently profitable by reporting positive net income based on generally accepted accounting principles (GAAP) for nine consecutive quarters. In the most recent fourth quarter, the company's adjusted net income of $12 million also was impressive. Revenue jumped 6% year over year to $259 million.
Industry experts predict more states like Pennsylvania, Florida, Maryland, Ohio, and Minnesota could also legalize cannabis this year. This means more opportunities for Green Thumb. It operates a significant number of stores under the Rise brand in these states.
Moreover, these states are limited license markets, meaning regulators are cautious about dishing out cannabis trade licenses freely. Companies who already hold these licenses have key advantages and could build a loyal customer base.
Green Thumb is financially robust, with $178 million in cash at the end of the year.
Which is the better choice?
When choosing between these two marijuana stocks, Green Thumb Industries is definitely the better buy. Aurora Cannabis has weaker fundamentals than domestic cannabis growers. The MSO is already profitable and has a strong presence in the U.S. cannabis market. Moreover, if cannabis is legalized at the federal level in the United States over the next decade or so, domestic producers like Green Thumb will have an upper hand.
Aurora, on the other hand, lacks significant financial strength to expand into U.S. markets. Given the fierce competition, Aurora could find itself left behind in the pack when it comes to establishing itself in the burgeoning U.S. market.
Wall Street analysts believe Green Thumb's stock is a strong buy, with a potential upside of 98% over the next year. Aurora, on the other hand, has a consensus hold rating and a 60% upside potential over the same time period.
