The enthusiasm surrounding Canadian marijuana companies back in October 2018 has disappeared.  Investors were first concerned over their steep valuations and negative profit margins.  More recently, investors have been disappointed by the slow roll-out of retail stores in major Canadian provinces, competition from a thriving black market, overvalued acquisitions, high inventory levels and shareholder dilution which continued to impact the financials of pot producers.

However,  the significant pullback in Canadian cannabis stocks also provides long-term investors an opportunity to buy the dip in stocks in a high growth industry.  According to Grand View Research, the legal cannabis market will be worth more than $70 billion by 2028.  

Today I will analyze two Canadian cannabis companies: HEXO (HEXO)  and Tilray (TLRY). Let’s see which stock is a better investment right now.

HEXO stock is down 95% from all-time highs

Shares of HEXO are currently trading 95% below record highs, valuing the company at a market cap of $450 million. While HEXO has increased its sales from just $4.93 million in fiscal 2018 to $80.78 million in fiscal 2020 (ended in July), its operating loss has also widened from $17.96 million to $163.8 million in this period.

Due to a high cash burn rate, HEXO has diluted shareholder wealth significantly over the years. The number of outstanding shares for HEXO have risen from just 19.17 million in October 2017 to 276 million at the end of April 2021. HEXO ended the fiscal third quarter with a cash balance of just $81 million which suggested investors should expect additional capital raises going forward to fund its recently announced acquisitions and negative profit margins.

In fact, HEXO stock lost a quarter of its market value in a single trading session this August after the company disclosed a secondary equity and warrant offering.

The Canadian pot heavyweight confirmed investors approved its acquisition of Redecan for CA$925 million or $733 million. This buyout will be funded in stock ($317 million) and cash ($416 million) and allow the company to command a 17% share in Canada’s recreational market, making it a leader in this segment. However, it will also pressurize HEXO’s financials in the near term.

Tilray stock is up 30% in 2021

One of the few marijuana stocks that has delivered positive returns in 2021, Tilray is the largest cannabis company in the country, following its merger with Aphria. In the fiscal first quarter of 2022 that ended in August, Tilray’s revenue rose 43% year over year, allowing the company to post its 10th consecutive quarter of adjusted profitability.

However, Tilray also used $93 million in Q1 to fund its operating activities. Comparatively, in Q4 of fiscal 2021, Tilray reported a positive cash flow of $8 million while in the year-ago period its cash burn was significantly lower at $56 million.

Tilray expects revenue to touch $4 billion by 2024, up from just $513 million in fiscal 2021. While this forecast should cheer investors, the company will have to pump in significant capital to fund its ambitious expansion plans, which will again lead to shareholder dilution.

The verdict

We can see that HEXO and Tilray will continue to remain volatile in the upcoming year due to their inconsistent financial performance. But I believe Tilray’s market leadership in Canada’s marijuana segment and improving financial metrics make it a better investment compared to HEXO at current prices.

HEXO shares were trading at $1.62 per share on Wednesday afternoon, down $0.04 (-2.41%). Year-to-date, HEXO has declined -55.98%, versus a 23.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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