Investing in the cannabis industry is tricky. Some investors may be tempted to entirely shun the space based on its performance over the last two years. However, a few companies still offer solid-looking fundamentals that may convince savvy investors to believe in their long-term potential.

After merging with rival Aphria, Canadian cannabis company Tilray Brands (TLRY -2.20%) has grown into a bigger and better business. And U.S. multi-state operator Green Thumb Industries (GTBIF -1.96%) is one of the few businesses that has consistently turned a profit in this fiercely competitive market. Both cannabis companies adopted some tactics that were successful for them.

But which of these two cannabis stocks might be the better long-term investment to add to your portfolio right now?

The case for Tilray

Tilray has always been my favorite Canadian cannabis company. It's performed relatively well, but industry headwinds like excess supply, fierce competition, and regulatory impediments are having an effect on earnings, including its most recent quarterly results.

In its fiscal 2023 third quarter (ended Feb. 28), total net revenue dropped by 4% year over year to $145.6 million. Management attributed that drop to oversupply issues as well as higher excise taxes. Tilray reported a $1.2 billion net loss, compared to a $52.5 million profit in the previous quarter. However, that included a $1.1 billion quarterly non-cash impairment charge that resulted from higher interest rates and a drop in the company's market cap.

Before external headwinds took a toll on it in the last few years, Tilray had been consistently profitable from an operational standpoint. Its peers Aurora Cannabis and Canopy Growth, are still struggling to get into the black on an EBITDA basis. Meanwhile, Tilray booked adjusted EBITDA of $14 million in fiscal Q3 -- its 16th consecutive quarter of positive adjusted EBITDA. However, adjusted EBITDA is not a true measure of profit. Tilray still needs to work on growing revenue and generating net profits.

Though the Canadian cannabis market is currently challenging, Tilray has a lot of potential in Europe. It's well positioned in Portugal and Germany due to Aphria's presence in the European market before the merger. It derives a significant portion of its distribution revenue from its German subsidiary, CC Pharma -- that revenue increased by 5% year over year to $65.4 million in fiscal Q3.

Management believes that the company's strong position in Germany will give it an early mover advantage when that country legalizes recreational cannabis along with other countries in the European Union.

Tilray has also worked to expand its business beyond the cannabis industry by entering the U.S. beverage and wellness markets through various acquisitions such as the SweetWater Brewing, Breckenridge Distillery, and Montauk Brewing. The company anticipates that these investments will assist its expansion in the U.S. market. Its balance sheet was strong at the end of the quarter, with $408.3 million in cash and marketable securities and $89 million in long-term debt.

The case for Green Thumb Industries

While profitability is still a big challenge for many cannabis companies, Green Thumb has reported positive GAAP net income for 10 consecutive quarters. In the fiscal 2023's first quarter, it reported an adjusted net income of $9.1 million. Revenue increased 2.4% year over year to $248 million.

Green Thumb expanded dramatically -- from 39 stores in 2019 to 79 as of April 2023, which helped it remain profitable. What's more, it operates in limited-license markets where the number of cannabis businesses that can operate is capped. This strategy helped it build a loyal customer base that will continue to favor it in the future.

At the end of the quarter, Green Thumb had $277.8 million in outstanding debt and $185 million in cash and cash equivalents. Green Thumb has a healthy amount of debt, as indicated by its debt-to-equity ratio of 0.16 (total debt divided by total shareholders' equity). A lower debt-to-equity ratio shows that a business is not relying heavily on debt to stay afloat or expand quickly. Debt repayment shouldn't be a major concern for Green Thumb if it continues to generate consistent profits.

Which is a better choice?

When it comes to investments in the cannabis industry, Green Thumb Industries and Tilray are both wise long-term choices. However, Green Thumb might hold a competitive advantage. If and when the U.S. federally legalizes cannabis, domestic cannabis businesses is more likely to reap the rewards first. It could be a while before Tilray can bolster its position in the U.S. market.

Unlike Tilray, Green Thumb doesn't have a presence in Europe. But if it chooses to do so, it's financially capable of establishing itself in the developing European market, as its rival Curaleaf Holdings has done. 

Green Thumb can continue to be a profitable company in the American cannabis market, which is vast. According to analysts at Grand View Research, the U.S. cannabis market could grow at a compound annual rate of 14% over the rest of this decade to reach $40 billion by 2030. Pennsylvania, Florida, Maryland, Ohio, and Minnesota could legalize adult-use cannabis this year. Green Thumb operates a significant number of stores in these states under the Rise brand. It opened two new locations last month in Pennsylvania and Minnesota.

Green Thumb stock is cheap now, trading at a price-to-sales ratio of 1.6, making it a good time to buy. Cannabis stocks are risky, though, so it would be wise to start with a modest investment in Green Thumb as part of a well-diversified portfolio of stable stocks.