The cannabis industry in Canada is in shambles. Pick a random pot stock and you're sure to find an investment that is down big over the past few years. Canopy Growth (CGC -1.84%) and Tilray Brands (TLRY -2.87%) are no exception -- they've fallen more than 50% in just the past 12 months. These businesses are struggling to grow and they are finding it difficult to reach breakeven. Their strategies, however, for fixing their problems vary. Which company is on the better path?
The case for Canopy Growth
Canopy Growth is hunkering down in an effort to streamline its operations and conserve cash as best as it can. The company has been laying off staff this year and it has even sold off its facility in Smiths Falls, Ontario, which served as its headquarters. It has also divested its retail operations in Canada.
NASDAQ: CGC
Key Data Points
Canopy Growth now likes to mention that it's transitioning to an "asset-light model," which is a much nicer way of saying that it's looking to cut whatever it can to bring down expenses. But that's what it needs to do if it wants to execute on some aggressive long-term plans.
Canopy Growth has been eager to enter the U.S. pot market for years; in 2019 it first revealed plans to acquire multi-state marijuana company Acreage Holdings. And since then, it has announced plans to work with Wana Brands and Jetty Extracts. But it can't close on those deals with marijuana still not legal in the U.S.
Canopy Growth is effectively in a bit of a holding pattern right now. Legalization doesn't appear imminent by any stretch, and the Nasdaq has also pushed back on the company's plans to consolidate and report on the performance of U.S. assets. By trimming its costs and making the business leaner, it can help make its cash last longer, potentially reducing the need to raise capital in the near future.
In the three-month period ended June 30, Canopy Growth burned through 148.7 million Canadian dollars ($108 million) over the course of its day-to-day operating activities. That's worse than the CA$140.5 million cash burn it reported a year ago. But with the company no longer planning to fund its cash-burning nutritional business, BioSteel, that should slow the rate of cash burn down. As of the end of June, Canopy Growth had cash and cash equivalents totaling CA$533 million, which could last more than a year if its cash burn slows down.
Canopy Growth's plans to get leaner can help the business at a time when being large in the highly competitive Canadian cannabis industry isn't necessarily a good thing. And improving its financials can put it in a good position to pursue growth opportunities in the U.S., if and when they open up.
The case for Tilray Brands
While Canopy Growth has been getting leaner, Tilray Brands has been in acquisition mode and diversifying its operations. One area that has been of particular focus for the business is alcohol. In August, the company announced it was going to acquire eight beverage brands from Anheuser-Busch InBev in a bid to expand its presence in the U.S. and its alcohol business. As a result of the deal, Tilray Brands projects it will hold 5% of the market for craft beer in the U.S.
NASDAQ: TLRY
Key Data Points
Diversifying into alcohol is a good move for Tilray because it can help improve its bottom line. Here's a comparison of the company's gross margin by segment in its most recent quarter, which ended in August:
| Segment | Revenue | Gross Margin |
|---|---|---|
| Cannabis | $70.3 million | 28% |
| Beverage | $24.2 million | 53% |
| Distribution | $69.2 million | 11% |
| Wellness | $13.3 million | 29% |
Data source: Company filings.
Beverages aren't a big part of the company's operations right now, but expanding more into that area could be a way for Tilray to improve its financials. Last quarter, the company's net loss totaled $55.9 million, less than a loss of $65.8 million in the year-ago period. As Tilray's beverage business grows, its bottom line should improve as well.
Both stocks are risky but Tilray looks better overall
Investing in Canadian marijuana stocks is extremely risky, but if you're looking specifically at these two pot stocks, Tilray is in a better position right now. The business is at least finding growth opportunities and ways for its operations and financials to improve. Canopy Growth's obsession with the U.S. market and simply waiting on it to open up is far too risky -- legalization could be years away from happening, assuming it happens at all.
Diversifying outside of cannabis is a sound strategy that could help Tilray's operations become stronger and make the stock a more tenable investment to hang on to (without having to rely on U.S. marijuana legalization), which is why it's far and away the better investment option today.
