As societal attitudes and legislative landscapes regarding cannabis evolve, the potential for federal legalization looms. This shift, particularly if the drug's scheduling moves from Schedule I to Schedule III, could greatly benefit multi-state operators in the cannabis sector.
With medical cannabis legalized in 38 states currently, the market is expected to grow significantly in the upcoming years. BDSA, a leading cannabis industry market intelligence platform, anticipates U.S. cannabis sales to skyrocket to $32.4 billion this year and reach $46 billion by 2028, driven notably by the adult-use segment.
Amid the U.S. Drug Enforcement Administration’s (DEA) reevaluation of its cannabis classification in 2024, there has been an uptick in interest in cannabis stocks. The increased curiosity, coupled with the growth potential, has proved beneficial for companies like Cresco Labs Inc. (CRLBF) and Tilray Brands, Inc. (TLRY), both of which are well-positioned in the rapidly budding market.
Here's a closer look at these two stocks to determine which is a better buy.
The Case for Cresco Labs Stock
Cresco Labs Inc. (CRLBF), headquartered in Chicago, is one of the top multi-state marijuana operators (MSOs) in the U.S. It cultivates, manufactures, and retails premium cannabis products. From flowers to edibles, it operates under multiple brands, including Cresco, High Supply, Good News, Wonder Wellness Co., Remedi, FloraCal, Mindy's Edibles, and Sunnyside. Its market cap currently stands at $708.5 million.
Shares of CRLBF have soared by 53.7% YTD, substantially outperforming the S&P 500 Index's ($SPX) 10.2% increase.
Priced at 0.95 times forward sales, Cresco currently trades at a more than 70% discount to its industry average. Given the company’s solid expansion potential, entering the stock at this valuation could be rewarding.
Shares of Cresco Labs spiked following the company's reported Q4 profit of $4.86 million, or $0.01 per share, along with revenues tallying $188.24 million, both of which beat analysts’ consensus forecasts. It nearly doubled its adjusted EBITDA to $55 million over the quarter. It achieved a positive free cash flow of $5.77 million for the year, attributing this progress to its "Year of the Core" strategy. However, its fiscal 2023 loss stood at $180 million as the MSO withdrew from Arizona and Maryland markets, and its high-profile merger collapsed.
Despite forecasting a marginal downturn in Q1 2024 revenue, caused by pricing pressure and heightened competitive pressure near its retail locations, Cresco Labs anticipates substantial growth later in the year and into 2025 and 2026. This growth is expected to be primarily driven by the transition towards adult-use markets in Ohio, Pennsylvania, and Florida. In fact, Cresco has already begun investing ahead of these anticipated conversions to capitalize on the emerging markets, which the BDSA projects will offer a combined opportunity worth $4 billion.
CRLBF has a consensus “Strong Buy” rating overall. Out of the nine analysts covering CRLBF, seven recommend “Strong Buy,” one suggests “Moderate Buy,” and one says “Hold.”
The average analyst price target for Cresco Labs is $3.68, indicating a potential upside of 76.5% over the next year. However, the Street-high price target of $9.64 indicates that the stock could rally as much as 362% from current levels.
The Case for Tilray Brands Stock
Canada-based Tilray Brands, Inc. (TLRY) is a global leader in medical cannabis research, cultivation, and distribution. Operating across multiple continents, it offers various cannabis, wellness, and beverage alcohol products under various brands, including Tilray, Aphria, and Broken Coast. Its market cap currently stands at $1.4 billion.
Shares of TLRY plunged 13.9% on a YTD basis, significantly lagging the returns of both CRLBF and the S&P 500.
Priced at 2.05 times forward sales, Tilray Brands is currently trading at a premium to Cresco Labs. However, the company’s growth prospects fail to justify this premium valuation.
Tilray’s growth strategy through acquisitions has been met with investor skepticism, as its stock plunged by over 90% since its 2018 market debut. Moreover, the share price slid after it reported mixed fiscal 2024 second-quarter results. While adjusted earnings topped Wall Street's expectations, the company's quarterly revenue fell short of forecasts – despite rising 34.4% to hit a record of $193.7 million.
Tilray’s beverage alcohol net revenue doubled during the quarter to $47 million. Strategic acquisitions like Montauk Brewing Co. and Anheuser-Busch's eight beer brands aim to reduce the company’s reliance on the volatile cannabis market. However, challenges persist, as the adjusted gross beverage alcohol margin dipped to 38% from 52% in the prior quarter, signaling potential struggles in the acquired craft beer sector.
However, Tilray's recent milestone in Portugal's medical cannabis industry marks progress, with approval for Tilray Oral Solution THC 5 CBD 20, enhancing patient care. Additionally, the company anticipates significant growth from Germany's cannabis policy update, with the German and European markets presenting substantial expansion opportunities totaling $48 billion.
TLRY has a consensus “Hold” rating on Wall Street. Out of the 11 analysts covering TLRY, three recommend “Strong Buy,” seven suggest “Hold,” and one advises “Strong Sell.”
Tilray's average analyst price target of $2.61 indicates a potential upside of 31.8% over the next year. However, the Street-high price target of $4.25 suggests that the stock could rally as much as 114.6% from current levels.
CRLBF vs. TLRY: Which Stock Is a Better Buy Right Now?
The potential for federal legalization of cannabis has attracted investors to cannabis companies like CRLBF and TLRY, and regulatory changes could spark significant upside potential for both companies down the road.
However, CRLBF might be the better stock to buy at current levels. Cannabis, though significant, is becoming a decreasing proportion of Tilray's diverse portfolio. Plus, the company's growth can largely be attributed to mergers and acquisitions rather than the organic growth of its cannabis business.
Factoring in Cresco Labs' cheaper valuation, robust growth potential, superior financial performance, and stronger stock price performance, it could be a better buy than TLRY now.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
