Canadian cannabis stocks skyrocketed after the country fully legalized marijuana in 2018. The market promised tremendous growth potential. Major players such as Canopy Growth (CGC), Aurora Cannabis (ACB), and Aphria (now part of Tilray Brands) quickly established themselves as industry leaders, raising billions of dollars and relentlessly expanding both domestically and internationally.
However, soon enough, the market was hit by a number of headwinds - including regulatory challenges, oversupply, rising black market sales, and U.S. legalization uncertainty. Canadian cannabis players struggled to make a profit. To survive, a few of them were wise enough to diversify their businesses or merge with other cannabis companies.
Despite these challenges, the Canadian cannabis market continues to provide significant opportunities for investors, particularly as the industry matures and consolidates. While U.S. federal legalization has been slow to materialize, it remains a significant potential catalyst for Canadian cannabis stocks.
Here is one cannabis stock that I believe will benefit significantly from the market's expansion, and one that I would avoid completely.
The One To Buy: Tilray Brands
Following its merger with Aphria in 2021, Tilray Brands (TLRY) is one of the largest cannabis companies in the world by revenue. The company has a strong presence in Canada and Europe, and it has been expanding its product line to include cannabis-infused beverages, edibles, and medical cannabis products.
Tilray, led by Aphria's former CEO, Irwin Simon, has maintained a large distribution network spanning 20 countries, which has the potential to propel the company to long-term success.
TLRY stock is down 30.8% year-to-date, compared to the S&P 500 Index's ($SPX) gain of 22.9%.
While the Canadian market faced challenges, Tilray expanded its product offerings beyond cannabis to include wellness foods and snacks, as well as craft beverages. The company announced a strong start to fiscal 2025. Net revenue increased 13% year on year to $200 million in the first quarter of fiscal 2025.
In Q1, cannabis revenue accounted for 31% of total revenue, though it dropped 12.9% to $61.2 million. The company has acquired Sweetwater Brewing Company, Alpine Brewing, and Breckenridge Distillery, among others, in the U.S. in recent years to expand its beverage alcohol business - which appears to be paying off. Tilray's beverage alcohol business generated $55.9 million in revenue, up 132% from the previous year's quarter.
Furthermore, distribution revenue from the German subsidiary Tilray Pharma contributed 34% of total revenue. The wellness business also contributed 7% of total revenue.
While Tilray has diversified its revenue streams and improved its cost structure since the merger, the company has yet to achieve consistent profitability. Furthermore, the cannabis industry as a whole has struggled with profitability, with companies facing high regulatory costs, supply chain inefficiencies, and pricing pressures caused by oversupply in key markets.
That said, TLRY's net loss narrowed to $0.04 per share from $0.10 in the year-ago quarter. The company ended the period with $280 million in cash, restricted cash, and marketable securities. Tilray also paid down $300 million of its convertible debt in the previous quarter.
Adjusted free cash flow stood at negative $39.4 million. The company did not provide any guidance for the entire year. Analysts covering the stock predict that Tilray's revenue will rise 15.7% to $913 million in fiscal 2025, followed by a 5.4% increase in fiscal 2026.
CEO Irwin Simon stated, “We believe that there is a greater likelihood that the upcoming U.S. Presidential elections will result in improved regulatory changes in the cannabis industry, as both candidates have publicly confirmed their support for further legalization. We are optimistic about the future of the cannabis industry and look forward to the potential opportunities that lie ahead.”
The U.S. represents the largest potential market for cannabis, and federal legalization could be a game-changer for Tilray. It is well-positioned to expand its presence in the US market, particularly given its involvement in the alcoholic beverage industry.
On Wall Street, Tilray stock is a “moderate buy.” Out of the nine analysts that cover the stock, three rate it a “strong buy,” and six rate it a “hold.” The average analyst target price of $2.29 implies an upside potential of 44% from current levels. The Street-high estimate of $4.00 indicates the stock could rise as high as 152.4% in the next 12 months.
However, as cannabis is a volatile sector that is highly sensitive to changes in regulatory environments, market conditions, and investor sentiment, the stock remains risky. For investors willing to take on risk, Tilray offers significant upside potential.
The One To Avoid: Aurora Cannabis
Aurora Cannabis (ACB) is a well-known name in the global cannabis industry, but it has faced significant challenges over the past few years. Aurora, based in Alberta, was once a cannabis market darling, reaching new heights during the early days of cannabis legalization in Canada.
While most Canadian top players expanded with the cannabis boom, Aurora's aggressive expansion via mergers and acquisitions backfired, resulting in large losses and high debt. These losses drove down the company's share price to the point where it was about to be delisted from the Nasdaq stock exchange. To avoid this, the company completed a reverse split of its stock in February.
ACB stock is up 16.6% year-to-date, lagging the broader market's gain.
After struggling for a while, the company has finally achieved its goal of reporting positive adjusted EBITDA (earnings before interest, tax, depreciation, and amortization).
The recent first quarter of fiscal 2025 resulted in an adjusted EBITDA of $4.9 million. Net revenue increased 12% year over year to $83.4 million. Additionally, ACB generated $6.5 million in free cash flow. Medical cannabis sales increased by 13% during the quarter, while consumer cannabis sales decreased by 10% compared to the year-ago quarter.
Although the company has achieved positive EBITDA, that does not accurately reflect profits. Net loss stood at $4.8 million in the quarter. The company has made progress in stabilizing its operations, but the path to profitability remains uncertain, due to tight competition and external headwinds in the Canadian market.
While Aurora’s first-quarter results showed improvement, the company's inconsistency in meeting its targets is a red flag. For those seeking high growth potential and stability in the cannabis sector, it may be wise to avoid Aurora's stock.
On Wall Street, ACB stock is a “hold.” Out of the five analysts covering the stock, only one rates it a “strong buy,” while four maintain a “hold.” The average target price of $6.29 suggests the stock can climb by 11.7% from current levels. ACB's high target price of $8.03 implies a 42.6% upside potential.
