What Is the Nasdaq's Best Cannabis Stock?

Cannabis stocks have been surging of late as optimism is running high about possible regulatory reform. There aren't many pot stocks on the Nasdaq, but I'm going to review and compare three of the biggest names on there to see which one is the best buy. Here's a closer look at Tilray Brands (TLRY 0.04%), Canopy Growth (CGC 0.04%), and SNDL (SNDL 0.02%), and whether you should consider investing in these businesses.

An overview of their strategies

The cannabis industry attracts many growth investors simply because of the potential as the market grows. The stocks on this list, however, are all Canadian-based marijuana companies -- due to the federal ban on pot in the U.S, no multi-state marijuana operator is able to trade on the Nasdaq. And with a smaller and much more competitive pot market in Canada, growth isn't easy to achieve these days. As a result, these companies have been looking at other ways to open up more opportunities for themselves. Here's a quick comparison of their approaches:

• Canopy Growth has been eyeing the U.S. market for years. In 2019, it announced plans to acquire multi-state operator (MSO) Acreage Holdings -- but it still hasn't been able to close that deal. This year it has announced the creation of a special purpose vehicle, Canopy USA, to hold all of its U.S.-based investments. The problem is that the Nasdaq has pushed back on that plan, and while it may be able to consolidate its investments in Wana, Acreage, and other U.S. companies, they will technically need to remain separate; Canopy Growth won't be able to include their results in its own. As a result, the company's growth still hinges primarily on marijuana legalization in the U.S. 
• Tilray Brands is in a similar situation after it acquired the senior convertible notes of MSO MedMen Enterprises, and the two companies would likely merge once it's permissible to do so. But Tilray isn't standing pat -- it has been busy expanding into alcohol. In August it said that it was acquiring eight brands from Anheuser-Busch InBev, and that it would end up being one of the largest craft brewers in the U.S. market. Not only would the move diversify its business, but it would expand its operations in the U.S. without having to rely on marijuana.
• SNDL has been expanding via acquisitions in recent years. But its focus has been on the Canadian market and getting bigger there. In 2021, it acquired cannabis retailer Inner Spirit Holdings, which made the company one of the largest operators of pot shops in the country. A year later it would acquire alcohol retailer Alcanna, which also had a majority stake in cannabis retailer Nova Cannabis. In January, SNDL also announced the acquisition of cannabis extraction company Valens. Acquisitions have played a key role in SNDL's growth, as the company reported net sales of 712.2 million Canadian dollars ($525 million) last year, which was up an incredible 1,170% from the previous year.

What their valuations look like today

In recent years, valuations for pot stocks have been crumbling due to a lack of progress toward federal marijuana legalization. Paying huge premiums for these businesses simply isn't the norm, as the growth has been underwhelming and investors are more skeptical about the prospects for legalization. The most expensive stock of the three is Tilray, but it's still trading at a fairly modest 3 times revenue.

None of these stocks is terribly expensive right now, and they are all much cheaper than they have been in the past. The most important question is where they are headed in the future, and which one of these businesses looks most likely to turn things around.

Which stock is in the best shape for the future?

All of these stocks face challenges ahead, but they also have some growth opportunities. Here's how I would rank these companies in terms of potential growth, in ascending order:

SNDL: Acquisitions have given the company a boost, but that's a short-term catalyst. In the end, the company is still in a hotly contested Canadian cannabis market, and that's where its growth will have to come from given its strategy. It does have a big alcohol business, but that doesn't scream growth either. For the period ended June 30, its liquor retail business only reported year-over-year revenue growth of 2%.

Canopy Growth: The company has been scaling back its operations in Canada, and with Canopy USA it will have some opportunities to aggressively expand in the U.S. I do like scaling back in Canada, but on the flip side, there's no telling if or when the U.S. market will eventually open up and be accessible for Canopy Growth. The company remains in a holding patten, and meanwhile it continues to burn cash.

Tilray Brands: Expanding into the U.S. alcohol market makes Tilray the most intriguing buy, because it's diversifying and yet building up a position in the U.S. that could pave the way for future growth there should the cannabis market open up. Its approach is a bit of a cross between that of SNDL and Canopy Growth. It's focusing on the U.S. market, but in a way where it can still increase revenue.

Should you invest in any of these stocks today?

Tilray Brands is the best stock on this list, but it's still not a convincing investment overall. Its growth has stalled, with revenue of $627.1 million for the year ended May 31 little changed from the previous year. Expansion into alcohol will help that, but then you're effectively investing in the U.S. craft beer market -- not a terribly exciting play. Tilray is ultimately the best cannabis stock among some very underwhelming investments. 

If you're keen on investing in cannabis, the better option may be to go outside of the Nasdaq and look at MSOs that are already in the U.S. pot market and have better near-term growth prospects.