The legal marijuana market has been evolving rapidly since 2012, when Colorado and Washington became the first U.S. states to legalize cannabis for recreational adult use. 22 additional U.S. states, two U.S. territories, and the District of Columbia have since joined them. On the world stage, recreational cannabis is now legal in Canada, Uruguay, and Malta. Several more countries, like Germany, Switzerland, and Poland, are in the process of considering more liberal marijuana policies, possibly opening the door to widespread legalization in these countries.
With the political movement to legalize marijuana gaining momentum worldwide, it might be a good time to start loading up on high-quality marijuana stocks. Aurora Cannabis (ACB -0.15%) and Tilray Brands (TLRY 1.71%) are two of the most prominent names in the legal cannabis space today. Both companies originate in Canada, but they have ambitions to become global leaders in the cannabis industry. Which stock is the better buy? Let's dig deeper to find out.
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The case for Aurora Cannabis
Aurora Cannabis is Canada's top medical marijuana producer by market share. It also has a large and growing footprint in 12 other areas, including high-value markets like Germany, Australia, and France. The company has also been investing heavily in research and development to create innovative and differentiated products that can help it build brand recognition and an economic moat. On the financial side of the ledger, Aurora's management thinks the company is on track to become cash flow positive in calendar year 2024.
However, Wall Street isn't convinced about the company's near-term financial goals. Despite Aurora's recent expansion into the profitable ornamental flowers segment, most analysts think the company remains a few years away from being cash flow positive consistently. The company also lacks a robust strategy to enter the high-value U.S. market upon the end of federal prohibition. Although this may not be a major concern in the short term, as the U.S. is unlikely to end federal prohibition anytime soon, it could limit Aurora's long-term growth potential.
The case for Tilray Brands
Tilray Brands is a leader in the legal marijuana market in Canada with an industry-best 13.4% market share, and in several other countries where medical marijuana is permitted, such as Germany, Poland, and Portugal. The company also has a strong presence in the craft alcohol and beer industry through its recent expansion efforts. This non-cannabis segment is expected to be a key pillar of growth for the company while the legal marijuana industry slowly matures.
Despite its diversification strategy, Tilray is still struggling to generate positive free cash flow. The company hopes to change this situation by the end of its current fiscal year, but some analysts are skeptical. For example, Morningstar's Kristoffer Inton believes that Tilray will not reach consistent profitability until late 2024 (calendar year) or early 2025. If that's true, Tilray would still be among the first within its Canadian peer group to reach this important financial milestone.
Which stock is the better buy?
Because of its diversification strategy into craft alcohol and beer, Tilray arguably screens as the better buy right now. Aurora's focus on the medical marijuana segment should prove to be a smart move over the long run, but Tilray seems closer to reaching sustainable profitability than its rival, Aurora. That being said, both of these cannabis companies face significant challenges. The legal cannabis market is growing fast, but several obstacles limit its appeal to investors at the moment.
