Don't look now, but SNDL (SNDL -3.38%) is becoming a better investment. The company is growing, and its financials are improving. While there's still no shortage of risk surrounding the business and the industry as a whole, SNDL is beginning to separate itself from the pack. Has it even become a better stock to buy than Tilray Brands (TLRY) and Canopy Growth (CGC -0.66%)?
The business is growing
A big problem for cannabis companies such as Tilray Brands and Canopy Growth has been that their sales numbers have been going in the wrong direction.
As a result, the industry hasn't been a hot area for growth investors to be focusing on lately. SNDL reported its fourth-quarter earnings on April 24, with sales of 240.4 million Canadian dollars for the period ending Dec. 31, 2022, coming in at more than 10 times the CA$22.7 million it reported in the prior-year period. Acquisitions, including its expansion into liquor, have been responsible for the bulk of that growth. But even on a quarter-over-quarter basis, the company's revenue was still up by 4%.
The challenge for investors is taking apart how much of the growth was real, organic growth versus just due to acquisitions, as SNDL has been involved with many deals over the past few years. But there's no question the company has been successful in growing its top line, which is something many of its peers have struggled with.
SNDL also isn't done with pursuing growth, as it noted on its earnings report that it is pursuing investment opportunities in multiple multi-state operators (MSOs) in the U.S. Canopy Growth has partnered with multiple MSOs, including Acreage Holdings, while Tilray Brands acquired convertible debt in MedMen in 2021.
Although SNDL hasn't locked in a partner just yet, it means that investors who want exposure to the U.S. market in the future may not be missing out by investing in SNDL over Tilray Brands or Canopy Growth.
SNDL's cash flow also looks better
Another area where Tilray and Canopy Growth have struggled is in generating consistently strong cash flow. And while SNDL doesn't have a terrific track record, it's showing signs of progress, and it has been on a better trajectory of late:
Unlike Tilray and SNDL, Canopy Growth has benefited from billions in investment dollars from Constellation Brands over the years, so it may not feel the same pressure to ensure its operations are cash-flow positive.
However, that's still something that should be important for cannabis investors, as a business that is burning through cash may need to raise money through stock offerings and dilute shareholders. SNDL noted in its recent earnings release that it has not had to do an offering since June 2021. And if its cash flow from operations remains strong, it may not have to do one anytime soon.
Should you buy SNDL stock instead of Canopy Growth and Tilray Brands?
One thing that's important to note here is that all of these stocks are risky buys. There's no doubt about that. The cannabis industry is struggling mightily due to excessive competition (including the black market), and while SNDL's financials have been improving, it's no coincidence that this has been happening as it has been expanding outside of the cannabis industry and becoming more of an alcohol company than a marijuana one.
Down 68% over the past 12 months, SNDL hasn't been a great buy, but there is the potential for the stock to do better if it can build on these results. The company does look as though it has become a better investment than Tilray Brands and Canopy Growth, but because of how underwhelming both of those businesses have been, that still isn't enough of a reason to make SNDL a buy. I believe there's unfortunately too much noise around SNDL's business and what other investments it may pursue that waiting on the sidelines remains the best approach for investors right now.
