Cannabis stocks are not especially appealing to investors now. Though some U.S.-based cannabis companies have excellent fundamentals that could lead to their success over the long run, very few Canadian growers stand a chance.
Tilray Brands (TLRY 1.71%) and Canopy Growth (CGC 2.41%) have been long-time favorites of investors. When the Canadian market boomed after that nation's move to fully legalize cannabis, the companies did well. However, because of tighter regulations, stiff competition, and market saturation, Canadian marijuana companies are now struggling to turn profits. There still could be hope for these two, but only one has the potential to thrive in this highly competitive industry.
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The case for Tilray
While most Canadian companies are struggling to increase revenue, Tilray delivered a solid performance in its last reported quarter. In its fiscal Q4, which ended May 31, it net revenue rose 20% year over year to $184 million, and net cannabis revenue increased 21%.
Beyond working on its cannabis business, Tilray is expanding its footprint in the U.S., positioning itself to benefit if cannabis is ever federally legalized.
Tilray's acquisitions of U.S.-based SweetWater Brewing, Breckenridge Distillery, and Montauk Brewing are paying off. Its alcoholic beverage net revenue increased 43% year over year to $32.4 million in its fiscal Q4.
These strategies contributed to the company's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA ) increase of 93% to $22 million in the quarter, which was its 17th consecutive quarter of positive adjusted EBITDA.
However, on the bottom line, Tilray still reported a net loss of $119 million in the quarter. The company stated it is working on reaching profitably in part by diversifying beyond the cannabis sector. Management also says its plans for growth do not rely solely on the premise that the U.S. will legalize cannabis federally anytime soon.
Tilray had $206 million in cash and marketable securities on its books at the end of the quarter, and just $24 million in long-term debt. Its goal for 2024 is to be cash flow positive. This should allow it to reduce its debt load while funding its growth efforts. It made $43 million in adjusted free cash flow in fiscal Q4, compared to negative free cash flow of $24 million in the prior-year period.
The case for Canopy Growth
Like Tilray, Canopy has recognized the importance of diversifying its business and not remaining a pure-play cannabis company. Its non-cannabis segments, such as BioSteel (which makes sports hydration products), This Works (which makes skin and wellness products), and Storz & Bickel (which makes vaporizers), saw impressive revenue surges this quarter.
However, the company can't reach profitability unless it achieves significant and consistent increases in revenue from its cannabis business each quarter.
In its fiscal 2024 first quarter, which ended June 30, total revenue climbed by 3% to 108.7 million Canadian dollars (about $80.4 million). Medical cannabis revenue in Canada rose to CA$14.4 million, up from CA$13.4 million in the prior-year period.
Recreational cannabis revenue, on the other hand, fell by 38%. Overall, its adjusted EBITDA loss was CA$58 million, narrowing from its CA$79 million loss in the prior-year period.
Canopy was the first to enter the market with derivatives -- vapes, edibles, concentrates, topicals, and other products -- after Canada legalized recreational cannabis in 2019. Those products drew a lot of attention at the time, but the market for them appears to be saturated now.
In fiscal Q1, it had a net loss of CA$42 million, in contrast to its net loss of CA$2.1 billion in the prior-year quarter. Much of the difference there can be traced to Canopy's write-down of CA$1.725 billion in non-cash goodwill impairment charges in the year-ago period.
Canopy ended the quarter with CA$571 million in cash, cash equivalents, and short-term investments, and CA$1 billion in debt. It also had negative free cash flow of CA$151 million.
Data source: YCharts.
Which is the better buy?
Canopy Growth is far from a good investment right now. It has to work on reducing its debt and generating consistent profit if it wants to survive in its highly competitive market.
Tilray, on the other hand, is doing well in Canada given the circumstances for the cannabis industry. The company is even making a name for itself on a global scale. The global cannabis market is also expanding rapidly, with a projected value of $82 billion by 2027.
Canopy has international operations as well, but it only generated $10 million from cannabis sales outside of Canada in its most recent quarter, a 26% decrease from the prior-year quarter.
Meanwhile, Tilray earns a sizable portion of its international revenue (reported as distribution revenue) from its German subsidiary, CC Pharma, which increased its sales by 19% year over year to $73 million in its fiscal Q4. Tilray had a strong presence in Portugal and Germany before its merger with Aphria. Its footprint has now spread to Italy, Poland, and the Czech Republic. Its focus on the Canadian and European cannabis markets could position it as a strong cannabis player globally.
With its robust fundamentals, global presence, strong leadership, and smart growth strategies, it could soon see black on its bottom line.
Tilray is still a risky investment. But between these two, it is the better cannabis stock for investors with an appetite for risk and a long-term outlook to invest in right now.
