Cannabis legalization in October 2018 was supposed to bring success to a booming industry and deliver immense returns to investors. Unfortunately, it turned out to be a pot bust. Cannabis producers incurred huge losses and continue to struggle with financial viability five years later.
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Top investment opportunities
The cannabis industry’s contribution to Canada’s economy isn’t entirely zero. Based on the joint report by the Ontario Cannabis Store and Deloitte, its contribution to GDP between 2018 and 2021 was $43.5 billion, along with 151,000 jobs nationwide. Some industry experts think a turnaround is possible with improved regulations and federal legalization in the US.
Today, cannabis stocks remain high-risk investments. However, an industry consolidation could lead to a rational cannabis market. Frederico Gomes, director of institutional research in life sciences at ATB Capital Markets, said competition is stabilizing a market that may be close to consolidating.
Gomes sees cannabis companies operating like firms in the consumer-packaged goods (CPG) industry or similar to tobacco and beer companies. Tilray Brands (TSX:TLRY) and Cronos Group (TSX:CRON) should be the top investment opportunities in such a scenario.
Market leader
Tilray has assumed market leadership with its 13.4% market share. The $1.7 billion company ranks no. 1 in sales for THC beverages, cannabis flower, oils, and concentrates; no. 2 in pre-rolls; and no. 4 in vape. Management said the most recent quarterly results confirm its market-leading position.
In Q1 fiscal 2024, net revenue increased 15% to US$177 million versus Q1 fiscal 2023, while net loss narrowed 15% year over year to US$55.9 million. Its Chairman and CEO, Irwin D. Simon, boasts that Tilray Brands’ is the most diversified global cannabis-lifestyle and CPG company and medical cannabis market leader in Europe.
Four distinct and complementary business segments bring balance to Tilray’s diversified business model. Besides medical and adult-use cannabis, it sells craft beer, spirits, ready-to-drink mixed cocktails in a can, non-alcoholic drinks, THC and CBD beverages, and wellness products. Tilray also engages in medical distribution.
Simon adds that Tilray is able and ready to capture several opportunities across multiple industries. Organic and acquisitive revenue growth should drive value and improve operating efficiencies, margins, and profitability.
The plan is to continue investing in the future and become a multi-billion-dollar company with a portfolio of best-in-class brands. Tilray trades at $2.31 per share (-37.06% year to date).
Best quarterly results
Cronos is another cannabis company reporting healthier Q3 2023 performance. The positive results should boost the cannabis producer. At $2.71 per share, the year-to-date loss is 21.22%. In the three months that ended Sept. 30, 2023, consolidated net revenue rose 22% to US$24.8 million versus Q3 2022. Notably, net loss improved 95% year-over-year to US$1.6 million.
Its Chairman, President, and CEO, Mike Gorenstein, said it was one of the best quarters in Cronos history. The $1 billion global cannabinoid company has a broader portfolio of unique and differentiated products. Gorenstein adds that Cronos is moving beyond its existing markets and opening new avenues for growth.
Redemption
Industry players failed in their promises to deliver superior returns after cannabis legalization. Still, Tilray or Cronos could redeem the sector and make investors rich soon.
