It's been a while since investors held the cannabis industry in high esteem. Marijuana stocks in the U.S. have been declining for the past two years amid oversupply, pricing pressure, and a lack of progress toward federal legalization. However, the industry as a whole is expanding rapidly and has excellent long-term prospects. According to estimates, the global cannabis market could be worth $149 billion by 2031.
At this point, cannabis stocks are suitable for patient investors with a high risk tolerance and long-term goals. Cannabis, like any nascent industry, will experience ups and downs, and it may be a while before the companies reach their full potential. I have two such stocks in mind, both of which have strong fundamentals and the potential to thrive as the market expands. However, one of them is the better option right now.
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The case for Curaleaf Holdings
Massachusetts-based Curaleaf Holdings (CURLF -0.79%) has been the top contender in the U.S. cannabis market for a while, in terms of revenue. In 2022, it earned $1.3 billion in total revenue. Mergers and acquisitions have been a significant factor in Curaleaf's performance. Curaleaf acquired several cannabis operators and brands between 2019 and 2021, including Select, Curaleaf NJ, Blue Kudu, Remedy, Grassroots, and others.
In the first quarter of 2023, the company's revenue rose 14% year over year to $336 million. However, profitability remains a challenge for Curaleaf amid the oversaturated market in the U.S., which is depressing cannabis prices. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 4% to $71 million in the first quarter.
International revenue increased by 53% year over year to $12.5 million. Management expects international growth to accelerate over the next three years as legalization spreads across Europe. Curaleaf also expects to generate $50 million to $60 million in free cash flow in 2023.
The acquisitions boosted Curaleaf's growth until oversupply became a drag on the entire industry. The company also expanded at a rapid rate. Currently, Curaleaf operates 152 stores in 19 U.S. states.
Curaleaf's balance sheet is now burdened by these growth initiatives. At the end of Q1, it had $116 million in cash, and $593.8 million in debt outstanding after deducting unamortized debt discounts.
The case for Green Thumb Industries
Unlike Curaleaf, Green Thumb Industries (GTBIF -1.08%) doesn't have a large presence in the American market yet. It operates a total of 79 stores nationwide. Yet it is closing in on its peers in terms of revenue. The company earned $1 billion in revenue in 2022.
It has quadrupled its revenue from $216 million in 2019, which is remarkable. Its store count has jumped from 39 in eight states in 2019 to 79 in 15 states in 2023.
This steady growth has likely allowed it to earn a profit while keeping its debt levels low. It has reported positive net income under generally accepted accounting principles (GAAP) for 10 consecutive quarters.
In the first quarter, the company's net revenue increased by 2% year over year to $249 million. Its GAAP net income of $9 million in the quarter also is impressive, given that most cannabis companies are struggling to increase revenue and be profitable in the face of oversupply and falling prices.
Green Thumb's expansion plans remain in place and the company expects to open 15 stores in Virginia, Pennsylvania, Minnesota, Nevada, and Florida this year.
Which is the better growth stock?
Right now, these are both good growth stocks that can capitalize on the burgeoning cannabis market in the U.S. and around the world. However, only companies that are prudent in their growth strategies and manage to be profitable without overburdening their balance sheets will thrive in the long run.
Cannabis businesses face a lot of pressure. The drug still is illegal on a U.S. federal level, making it difficult for growers to borrow from bank lenders to finance expansion. This forces many of them to raise capital through secondary stock offerings, diluting the ownership stake of shareholders.
Data source: YCharts
Curaleaf has taken on a lot of debt while expanding rapidly. In comparison to Green Thumb, it has a high debt-to-equity ratio of 0.48. Green Thumb's lower ratio, on the other hand, indicates that the company does not rely heavily on debt to survive. Green Thumb is also profitable despite operating in a highly competitive market, making it the better cannabis stock to invest in right now.
However, cannabis stocks are risky, so a small stake in Green Thumb as part of a well-diversified portfolio of stable stocks would be a good place to start.
