Investing in turnaround plays isn't a strategy for the faint of heart, especially not when it comes to Canadian cannabis businesses. Major competitors like Tilray Brands (TLRY +1.12%) and SNDL (SNDL -1.59%) have lost a significant portion of their value over the last few years while the stock market has grown more than 30%, even amid the effect of a brutal bear market in 2022.
But at least one of these two companies has a credible chance of seeing its fortunes changing for the better -- potentially leading to solid investor gains. Here's how to figure out which of these stocks is an opportunity, and which is more likely to lose your money over the next couple of years.
NASDAQ: SNDL
Key Data Points
SNDL's growth potential remains limited
SNDL's turnaround is in full swing, and its progress is undeniable. Thanks to its purchase of a handful of liquor distributors and smaller cannabis businesses in Canada, its trailing 12-month sales are up 77% since this time last year, reaching $685 million.
Management says that the company is aiming to become profitable in 2024. And with minimal quarterly cash outflows over the last few quarters, and $163 million in cash and short-term investments on hand, it isn't under much financial pressure to reach profitability soon anyway.
It's currently slashing costs for its cannabis operations by centralizing cultivation and manufacturing. Its quarterly gross margin and its cost of goods sold (COGS) as a percentage of revenue are both improving markedly as a result. In other words, SNDL looks like it'll probably succeed in reaching profitability relatively soon. The question is whether it can keep growing afterward without making a major strategic pivot into new markets.
On that front, the answer is far less certain. Though its SunStream Bancorp cannabis investment bank launched its U.S. subsidiary in late September, its primary marijuana and alcohol market is in Canada. There is little reason to suspect that demand for liquor will skyrocket there anytime soon, even if it provides steady cash flows. Likewise, while it could generate some interest income from its investments, so far it hasn't been anything more than a marginal contributor to the top line.
So what will happen to SNDL when it reaches the bottom of the already tapped-out Canadian cannabis market? At that point, it could make another turnaround, but for the worse.
Tilray doubles down on booze while awaiting key catalysts
Tilray's turnaround is less mature than SNDL's, and its focus is different. Operationally, despite being nowhere close to profitability, it continues to post significant improvements each quarter to its quarterly gross margin and COGS. But its revenue of $627 million hardly grew over the last 12 months, which is attributable to its home market of Canada experiencing a glut of cannabis.
NASDAQ: TLRY
Key Data Points
The company already has plans in place to expand all over the map to stoke more growth. Its medicinal marijuana businesses in the E.U. mean that it's exceptionally well-positioned to start tacking on revenue from cannabis legalization, should it occur there. Similarly, it has a plan to enter the U.S. recreational marijuana market via realizing its option to secure a minority stake in another company upon federal legalization. Legalization in both places has been a much slower process than anticipated, however.
Tilray also recently purchased eight beer brands in the U.S., which now makes it the fifth-largest craft brewer in the country. Management thinks the purchase will equate to around $250 million in annual sales. Therefore, even though Tilray has a lot more work to do before it's profitable, shareholders don't need to worry about growth in the interim.
The more diversified player wins right now
Both Tilray and SNDL could be decent picks to bet on for a turnaround. In the long term, SNDL's focus on the Canadian market could be a problem since all of its target markets there are saturated already. But it could still eventually flourish anyway if its operational improvements continue to pay off. A major point of uncertainty is when the market will finally notice the progress it's made and bid up its shares accordingly.
On the other hand, Tilray is a much better option for investing in a turnaround play at the moment despite its remaining operational inefficiencies and its stalled plans to access the meatiest parts of the U.S. and E.U. cannabis markets. Its foray into alcohol sales in the U.S. is likely to be a key part of its improving fortunes, and its leadership in Canadian cannabis looks to be persistent, albeit less dominating than before.
Furthermore, as a company and as a stock, its visibility is much higher than SNDL's. And that means shareholders may not need to wait too long for more favorable financial results and hopefully seeing their shares rise.
