Cannabis stocks like Canopy Growth (CGC 2.41%) and Tilray Brands (TLRY 1.71%) are obvious places for investors to look for growth. Thanks to their place in a rapidly growing and multinational industry, both companies have an impressive slate of opportunities to pursue.
At least in theory. As it turns out, one of these players is much more likely to delight investors with strong returns than the other.
Canopy is trimming the fat, but growth remains a struggle
Canopy's near future looks a lot like its past. Over the last few years, the company has been embroiled in an all-too-common quagmire of the marijuana industry. During the boom of the Canadian cannabis market after the country legalized recreational marijuana in late 2018, it built out a smorgasbord of product lines and brands while capturing as much market share as possible via cultivation facilities and retail outlets. Then, there were so many competitors doing the same activities that the market became flooded with inexpensive cannabis. That drove prices down and worsened Canopy's unprofitability, and it entered into a multiyear rightsizing process that's still ongoing.
In late September 2022, Canopy divested all of its Canadian retail operations in a pivot to an asset-light business model intended to focus on penetrating the then-nascent U.S. market. The company consolidated its manufacturing facilities and cut costs wherever possible, even at the expense of leaving revenue on the table. In October 2023, it started selling off some of its Canadian production facilities, too, as its cash holdings started to dwindle. By December 2023, it was selling off non-cannabis businesses like its BioSteel sports drink brand.
Now, its quarterly revenue is down by 56% over the last three years, reaching $52 million. Worse, its trailing-12-month operating margin is deeper in the red than it was in the summer of 2021. Of course, management plans for Canopy to report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) before the close of its 2024 fiscal year, which ends in March, but that's a far cry from actual bottom-line growth.
Tilray marches on
Tilray, much like Canopy, saw its fortunes rise during Canada's cannabis boom. But, unlike Canopy, it pivoted into selling alcohol in Canada at a fortuitous time, which enabled it to avoid the worst of the cannabis market's fallout. Now, alcohol sales are a major component of its business, and its footprint of craft beer brands in the U.S. appears to be a consistent boon.
Per its fiscal second-quarter 2024 earnings report published Jan. 9, (for the period ended Nov. 30, 2023) it's now the fifth-largest owner of craft breweries in the U.S., and it's also the biggest cannabis company in Canada by revenue. Its sales topped $194 million in the quarter, up by 34% year over year, with its marijuana and alcohol segments both gaining ground. So it isn't having any trouble growing its top line.
The trouble is Tilray is still unprofitable, and its quarterly gross margin of 24% shows that there's still an abundance of work to be done on that front. But management claims that the business will be free-cash-flow-positive on an adjusted basis by the end of May. Time will tell if it can consistently produce cash.
There's a clear winner here, but investing is (still) risky
Lack of growth makes it difficult to say that Canopy Growth is a must-buy stock. In contrast, Tilray is succeeding in adding to its top line at a moderate-to-quick pace despite its ongoing lack of profitability, so it's the better pick for growth.
Still, Tilray's shares are notoriously risky, and if it misses its target for generating cash flow, don't be too surprised if the stock lags for a while. I wouldn't suggest investors go all-in on the stock, but if you do take a bite, prepare to be patient and be ready to hold on to your shares for a couple of years before seeing a return.
