Canadian cannabis stocks have been struggling lately as they have been impacted by a variety of structural issues. The cannabis industry is still in a nascent growth stage and has already attracted multiple players making it a crowded space right now.
Further, growing cannabis requires significant capital expenditures for companies to benefit from economies of scale. Marijuana is also highly regulated and the slow rollout of retail store licenses in major Canadian provinces has severely impacted demand in the last three years.
However, the relaxation of lockdown rules in Canada and a rapidly expanding addressable market coupled with the prospects of marijuana legalization in the U.S., make Tilray (TLRY) and OrganiGram (OGI) intriguing potential long-term investments. Today I’ll analyze both stocks to determine which is currently the better buy.
Tilray is a cannabis giant
Tilray merged with Aphria a few months back and the combined entity is now valued at a market cap of $4.95 billion. In the fiscal fourth quarter of 2021 that ended in May, Tilray reported a net profit for the first time ever. The cannabis heavyweight also reported its ninth consecutive quarter of positive adjusted EBITDA in Q4.
Tilray expects to generate around $80 million in annual cost synergies post the merger. In the quarter ended in May, Tilray confirmed it achieved $35 million in synergies and is on track to touch $80 million in the next five quarters.
Prior to the merger, Aphria already had a presence in international markets including Europe, South America, and Africa. It generates a significant portion of distribution sales from CC Pharma which is Aphria’s subsidiary based out of Germany. In Q4, distribution sales accounted for 47% of total Tilray revenue.
Tilray is also targeting expansion in Poland, the U.K., Israel, Italy, and the Netherlands. The cannabis market in Europe is forecast to touch $37 billion by 2027, growing at an annual rate of 29.6% in the next six years.
OrganiGram is a much smaller player
Valued at a market cap of $657 million, OrganiGram stock is down 74% from record highs. The company reported net revenue of $20.3 million in the fiscal third quarter of 2021, which ended in May. Its top-line grew 39% on a sequential basis. However, in fiscal Q2, OrganiGram’s sales were down 37% year over year at $14.6 million.
Despite expansion in revenue, OrganiGram’s gross profit stood at just $2.1 million and would have in fact been negative if we exclude fair-value adjustments. The Canadian cannabis producer expects profit margins to improve in the upcoming quarters as it has claimed to have identified several cost efficiency opportunities that will enhance its gross margin profile.
I believe Tilray is currently the better investment. Tilray just reported its first profitable quarter and OrganiGram is impacted by massive losses and heavy cash burn. Further, Tilray’s leadership position in Canada and its larger size allows it to tide over a sluggish macro-economy making the marijuana heavyweight a winning bet right now.
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TLRY shares were unchanged in after-hours trading Monday. Year-to-date, TLRY has gained 30.02%, versus a 15.77% 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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