Marijuana has been one of the most disappointing equity investments of all time. Most cannabis stocks have lost the majority of their value over the past five years due to a litany of trials and tribulations, such as the slow pace of legalization in the U.S., burdensome tax regimes, and supply chain mismanagement by several of the major operators.
Still, most experts believe cannabis will eventually become legally permissible and broadly accessible for adults in key geographies like the E.U. and the U.S. by the middle of the next decade. Estimates vary wildly, but the general consensus is that the global cannabis market ought to be worth hundreds of billions by 2035.
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From a growth standpoint, global marijuana sales are forecast to rise by around 25% annually for the next 10 years, thanks to a steady increase in the number of territories legalizing the plant, as well as an uptick in the scientific research being performed on cannabis.
Canadian cannabis cultivators Aurora Cannabis(NASDAQ: ACB) and Tilray Brands(NASDAQ: TLRY) have been at the forefront of this revolution ever since their home country legalized adult-use recreational marijuana in 2018. As a result, both companies have seen their share prices crumble under the weight of the aforementioned pressures (see graph below).
ACB Total Return Level data by YCharts
Which one of these beaten-down Canadian cannabis stocks is the better long-term growth play? Let's dig deeper to find out.
Aurora Cannabis: Angling for higher-margin medical marijuana
Aurora Cannabis is quickly becoming a medical cannabis specialist. In its most recent fiscal quarter, the company reported a 20% uptick in medical cannabis sales, relative to the same period a year ago.
Medical marijuana now accounts for approximately 68% of the company's total net revenue. This strategic shift, per the company's commentary, is projected to push Aurora toward positive free cash flow generation by the end of this calendar year.
Why is Aurora's emphasis on medical so critical? Medical marijuana has some key advantages over consumer cannabis. The medical segment tends to sport higher prices, higher profit margins, and a larger number of repeat customers. This category is also rapidly becoming the first to be widely legalized internationally.
What's Aurora's appeal as a growth stock? The company's shares trade at just 1.4 times its 12-month projected sales. In a field growing at nearly 25% per year, that's a bargain basement valuation.
Tilray Brands: Building for the long term
Tilray Brands is more of a diversified cannabis operator than counterpart Aurora. It sells a mix of CBD, craft alcoholic beverages, and cannabis.
Tilray's core business model has centered around "growth-by-acquisition." By acquiring other undervalued companies, it has built a fairly broad footprint in both craft alcohol and cannabis.
What's Tilray's growth outlook? Over the next 24 months, the company is forecast to deliver top-line growth in the neighborhood of 36%, which is one of the fastest growth rates in the industry right now.
What's the risk? Like all Canadian cannabis operators, there is the real risk of missing out on the U.S. market upon federal legalization. The U.S. market has evolved in piecemeal fashion, leading to a highly fragmented market.
Tilray, for its part, may not have the financial resources to compete against consumer goods juggernauts like Altria that have signaled an intent to go full bore once marijuana becomes legal at the federal level.
Verdict
On paper, Tilray looks like the better buy. The company has successfully diversified beyond cannabis in a meaningful way, and it is experiencing double-digit revenue growth as a result.
Nonetheless, Aurora is still the better marijuana stock to buy now. Medical marijuana is likely to be the primary market for perhaps another decade, and Aurora's decisive lean into this segment bodes well for its future.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
