If you're an investor who is bullish on the prospects for marijuana in the long term, then odds are, you're familiar with both Tilray Brands (NASDAQ: TLRY) and Canopy Growth (NASDAQ: CGC). These companies are both based in Canada and have been eyeing opportunities in the U.S. cannabis market -- if and when it eventually it opens up due to federal legalization. But they have taken very different approaches in their strategies in recent years. And Tilray Brands has emerged as the better overall investment than its key rival.
Tilray Brands has focused on opportunities outside of cannabis
Canopy Growth's strategy centers around hopes for cannabis legalization in the U.S. The company has even created a special purpose vehicle, Canopy USA, for the purpose of holding its positions in U.S.-based businesses, since it can't acquire U.S. cannabis companies outright and remain listed on the Nasdaq Stock Market without running afoul of regulators.
Tilray is also hopeful for legalization but it hasn't been standing pat. The company has been making moves to grow in whatever way it can. And that includes expanding into other industries, such as alcohol. In the past few years, Tilray has acquired alcohol beverage brands and today has become one of the top craft brewers in the U.S. market. Not only has that opened up new growth opportunities, but it also puts it in a position where it may be profitable in the near future.
Tilray's financials look better than Canopy Growth's
A big benefit of diversifying outside of the highly competitive cannabis market in Canada is that Tilray is able to achieve wider margins, and that puts it in a better position to post a profit. In its alcohol business, the company recently reported an adjusted gross margin of 53%, versus 40% in cannabis. For the period ended May 31, Tilray's operating loss totaled $16.5 million, which was much less than the $90 million loss it reported in the prior-year period. And it reduced its loss while also expanding; during the period, net revenue grew by 25% to $229.9 million.
Canopy Growth, meanwhile, has been selling assets and getting leaner in an effort to become a sustainable business. But it still struggles to stay out of the red. In the three-month period ended June 30, Canopy Growth's operating loss totaled 29.1 million Canadian dollars ($21.2 million), which is an improvement from the CA$54.7 million loss it incurred in the prior-year period. And to achieve that, the company has sold assets that were once seen as key parts of its long-term growth opportunities, such as sports nutrition business BioSteel. In Canopy Growth's latest quarter, revenue of CA$75.8 million marked a 14% decline from CA$88.6 million a year ago, indicative of its lighter operating model. But in return for a smaller business, investors would have arguably expected much more improvement in the bottom line by now.
Is Tilray worth investing in today?
Neither of these pot stocks has been a terribly great investment in recent years, with Tilray stock down 87% in the past three years and shares of Canopy Growth plummeting 97% during that time frame. But as Tilray dives deeper into alcohol, there's potential for the business to generate better results and for it to widen that gap in the future.
Although Tilray Brands may be the better overall investment, that doesn't necessarily mean that it's a good investment overall and worth buying today. There's still lots of doubts about how the business will do in the long run. Today, its growth rate is benefiting from acquisitions and that is likely to slow in the future. And while it is making progress on the bottom line, it also still isn't profitable.
There's more reason to be bullish on Tilray's prospects for the future than there is for Canopy Growth's these days, but both stocks are arguably too risky for most investors. If you want to invest in the cannabis industry and capitalize on its long-term growth prospects, investing in a cannabis exchange-traded fund may be the better option.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
