Marijuana stocks have fallen out of favor in the last two years. But the pot business is experiencing fluctuations like any other evolving industry. Investors who can be patient and wait for the industry to reach its full potential could be rewarded greatly. In fact, experts predict that global cannabis sales will increase at a compound annual rate of 20% to $149 billion by 2031.
The Canadian producers Aurora Cannabis (ACB -19.39%) and Tilray Brands (TLRY -17.00%) are two of the most popular marijuana companies. Only one of them, however, seems to have the potential to thrive in the long run.
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Aurora Cannabis reported its first positive EBITDA quarter
Aurora Cannabis has been investors' favorite among pot stocks for a while. But after its balance sheet was burdened by some of its reckless decisions, like an acquisition spree, the stock has dropped by 99% in the last five years.
However, its most recent quarterly results gave reason to believe that the company is on the mend. It finally achieved its long-awaited goal of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which came in at 1.4 million Canadian dollars ($1.03 million) in the second quarter of fiscal 2023. It is a significant improvement over the year-ago quarter's adjusted EBITDA loss of CA$7.1 million.
But there's more to the picture than meets the eye. To begin with, EBITDA is not a true measure of profit. Second, it still had a net loss of CA$67 million in the second quarter. It spent CA$60.6 million in cash on operating activities in the quarter, compared to CA$31 million in the first quarter, implying that it is burning more cash than it is making.
Although it appears to have a strong balance sheet with CA$310 million in cash, the company is still losing money. Furthermore, Aurora has raised the majority of its funds by reissuing shares, which does not sit well with investors. The company does not have a deep-pocketed partner like its peers to help with its expansion if and when cannabis is federally legalized in the U.S. Aurora management would have to prove it can reduce cash burn while boosting the top line organically to last in the long run.
Tilray's European expansion could be worthwhile
In 2021, Aphria and Tilray, two Canadian cannabis companies, merged to form Tilray Brands in an all-stock deal worth $3.9 billion. Tilray has benefited from the merger in a variety of ways, but it was also affected by the external headwinds that have engulfed Canadian cannabis companies (excess supply, fierce competition, regulatory delays, and rising black market sales).
However, Aphria had strengthened its position in the European market, which Tilray took advantage of. So, while the Canadian cannabis industry is struggling, Tilray continues to grow through its European operations, with cultivation and distribution in Portugal and Germany. The company earns a significant portion of distribution revenue from its German subsidiary CC Pharma.
Distribution revenue increased 5% year over year to $65.4 million in the company's fiscal third quarter, which ended Feb. 28. But its total net revenue fell 4% year over year to $145.6 million. Management attributed the revenue decline to demand-supply imbalances as well as excise-tax pressure.
While peers continue to struggle to be EBITDA positive, the company recorded its 16th consecutive quarter of positive adjusted EBITDA, at $14 million. It reported a $1.2 billion net loss, compared to a $52.5 million profit in the year-ago quarter. Management attributed this loss to a $1.1 billion noncash impairment charge caused by higher interest rates and goodwill reassessment (due to a drop in the company's market cap).
Adult-use marijuana could soon be legal in Germany, and other European countries could follow suit. Tilray's management believes it has an early mover advantage as the European cannabis market will grow at a compound annual rate of 61%, reaching $14 billion by 2022. Tilray's global exposure could serve as a buffer in the long run.
There's only one clear "winner" here
When it comes to earning long-term profits from a cannabis stock, Tilray is the better option here.
I see no reason for Aurora's stock to recover anytime soon unless the company begins to generate profits. Moreover, I believe the company could be heading for another reverse stock split to keep its stock from being delisted.
In 2020, Aurora faced a similar situation in which its stock price remained below $1 for an extended period, putting it at risk of delisting from the New York Stock Exchange. It was then forced to consolidate its shares in a 1-for-12 reverse stock split. Such a move gives a stock a quick boost from short-term gains, but the good times are usually fleeting.
Despite external headwinds in Canada, regulatory pressures, and the rise in black market sales, Tilray has managed to keep its business relatively stable and costs low while closing on a huge merger. The company's efforts in diversifying beyond the cannabis space and in different global markets could help it turn around and put it ahead of its peers in the long haul.
Tilray's stock is cheap now, trading at a price-to-sales ratio of 2.4, making it a good time to buy. But cannabis stocks are risky, so starting with a small investment in Tilray, as part of a well-diversified portfolio of stable stocks, would be a wise move.
