The marijuana industry is currently very interesting. While the majority of marijuana stocks are declining, affected by a lack of progress toward legalization, the sector as a whole is expanding rapidly. The global cannabis market is predicted to reach $149 billion in annual sales by 2031, growing at a compound annual growth rate of 20%, according to estimates from Allied Market Research.
Canadian cannabis company Aurora Cannabis (ACB -1.15%) has been investors' favorite for quite a while. The company recently hit its target of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), impressing investors. Meanwhile, after concentrating solely on its home state of Florida for the past few years, domestic marijuana player Trulieve Cannabis (TCNNF -5.95%) is emerging from its cocoon.
Over the past year, both stocks have fallen by more than 60%. Although one of them looks better equipped to deal with industry challenges, the company as a whole has solid fundamentals and the potential to be very profitable in the long run. Let's dig in to find out which is the better buy right now.
Image source: Getty Images.
The case for Aurora Cannabis
Aurora Cannabis gained popularity after Canada legalized medical cannabis in 2016. As the market expanded, the company went on an acquisition binge, putting a strain on its balance sheet. What's more, a demand-supply imbalance soon threatened Aurora's top line in the Canadian market and dragged its stock down by 99% in the last five years. The company began to lose money and was forced to close the majority of its underperforming facilities to achieve its long-awaited goal of positive adjusted EBITDA.
It finally hit its target in its second-quarter fiscal 2023 (period ended Dec. 31). An improvement over the adjusted EBITDA loss of 7.1 million Canadian dollars in the prior-year quarter, adjusted EBITDA in the recent quarter came in at CA$1.4 million.
However, EBITDA does not accurately reflect profit. In the quarter, it reported a net loss of CA$67 million. Sequentially, it spent more cash (CA$60.6 million vs. CA$31 million ) on operating activities, suggesting it is spending more money than it is bringing in, which is not a good sign.
With roughly CA$260 million in unrestricted cash, the company asserts it has a solid balance sheet. However, most of its funds were raised by reissuing shares, which is bad for shareholders. Aurora doesn't even have a reliable financial partner to support its growth in the booming U.S. market if and when U.S. federal legalization occurs. Further, Aurora seems highly leveraged with over CA$220 million in debt. Before Aurora can demonstrate that it's a good growth stock, it has many obstacles to deal with.
The case for Trulieve Cannabis
Multi-state operator (MSO) Trulieve Cannabis isn't as favored as Aurora yet. But over the past few years, this MSO has proven itself. From a small medical cannabis company in its home state of Florida, it has come to dominate the state with 125 stores.
Trulieve runs 56 additional stores across the nation and provides a broad range of cannabis products for both medical and recreational use. In the first quarter of 2023, the company added three new locations, bringing its total to 186 across the country.
Before the oversupplied U.S. market began to impact its top line, the company had been consistently profitable for many quarters over the previous three years. The company's recently reported first-quarter total revenue decreased 9% year over year to $289 million. In addition, adjusted EBITDA dipped to $78 million from $105 million in the same quarter last year.
Yet, the company is actively scaling up and has the necessary financial stability to do so. The company ended the quarter with $195 million in cash, cash equivalents, and restricted cash.
When Florida legalizes recreational marijuana, its statewide dominance will be useful, as few marijuana companies have such a strong presence there. The state is still undergoing development with the 2024 legalization initiative. Trulieve's monopoly in a limited-license market guarantees a devoted customer base and ongoing profits for years to come, enriching shareholders.
But Trulieve must also be careful not to overextend itself and burden its balance sheet like Aurora Cannabis did.
Which should you buy now?
The choice is very clear. The best growth stock to buy now is Trulieve Cannabis.
Aurora could take a while to bounce back unless it starts generating profits. Also, I worry that Aurora's stock may undergo another reverse stock split to prevent it from getting delisted. It faced a similar situation in 2020 when it was forced to opt for a 1-for-12 reverse stock split as its shares consistently traded below $1 (below the New York Stock Exchange's trading limit).
If it decides to grow like rival Curaleaf Holdings, Trulieve has a lot of opportunity, even in international markets, as more European countries could legalize marijuana in the near future. The U.S. market is also huge for this MSO. As more states legalize marijuana, Trulieve could have a wider market share as the industry headwinds fade.
Though Trulieve is a better growth stock than Aurora, note that it is still risky. Until the industry realizes its full potential, Trulieve's path may be an uphill battle. If investors can be patient and can stomach these risks, it could be a better cannabis investment for the long haul.
