The cannabis industry is growing quickly. In 2020, the global cannabis market was estimated to be valued at $20.5 billion and it’s expected to reach $90.4 billion by 2026.
However, given the increase in competition and negative profit margins of most marijuana producers, it's important to identify companies with leadership positions that have the potential to derive outsized gains.
Sundial (SNDL) and Tilray (TLRY) are two Canadian cannabis companies that have been extremely volatile this past year. Let’s see which stock is a better buy right now.
Tilray merged with Aphria
Tilray completed its merger with Aphria in May 2021 creating the largest cannabis company in Canada. While it will be impacted by integration challenges in the near term, the combined entity should be profitable on an adjusted EBITDA basis by the end of 2021.
Tilray will also lead the Canadian retail cannabis market and can take advantage of its existing presence in Europe to gain traction in that region as well. Aphria is the largest medical marijuana distributor in Germany while Tilray has a production facility in Portugal.
Further, Manitoba Harvest that is part of Tilray, is one the largest hemp foods producers in the U.S. Aphria also acquired Sweetwater Brewing which is a craft beer manufacturer, in late 2020. These acquisitions will allow Tilray to leverage its expertise across verticals and enter the U.S. markets at an aggressive pace once cannabis is legalized at the federal level.
In the most recent quarter, Tilray sales fell 8% year over year to $48 million while Aphria’s top-line was up 6% at CA$154 million. Both the companies have not impressed investors based on their financials recently.
Analysts expect Tilray sales to rise from $562 million in 2021 to $861 million in 2022 which means the stock is valued at a forward price to 2022 sales multiple of 9.44x. Wall Street also expects its loss per share to narrow from $1.69 in 2021 to $0.22 in 2022.
Sundial investors have experienced wild swings in 2021
Sundial stock has been part of the Reddit-fueled short squeeze saga making it extremely vulnerable to wild swings in 2021. SNDL stock IPO’ed in August 2019 and touched a record high of $11.5 per share shortly after going public. However, it fell to $0.47 per share by the end of 2020 and was one of the worst-performing Canadian cannabis stocks.
However, the “meme stock” was targeted by the Reddit group of retail traders which sent its shares to $2.1 in February 2021. It's trading at $0.95 per share right now.
In the last 12 months, Sundial sales were $56.8 million, significantly lower than its revenue of $76 million in 2019. In Q1 of 2021, Sundial sales were down 30% year over year at CA$11.7 million. Its quarterly results in Canada are really poor when you consider Canada’s cannabis sales rose 65% year over year in March.
Sundial confirmed it will reduce its product portfolio significantly and focus on high-margin items going forward. The company is also shifting its business model and is looking to create alternate revenue streams by financing other cannabis companies. In Q1, its investments and loans generated close to CA$16 million in sales which was more than revenue from cannabis distribution.
One thing working for Sundial is its massive cash position of $750 million and a debt-free balance sheet. In 2020, the company’s operating expenses were less than $40 million providing Sundial with enough liquidity to stage a turnaround.
Sundial has diluted shareholder wealth in the last 12-months via multiple equity raises. However, a diversified revenue base, improving profit margins, and accretive acquisitions may allow the stock to gain momentum in 2021.
Analysts expect Sundial sales to fall 9.5% to $45.72 million in 2021 and rise by 55.6% to $71 million in 2022. It suggests SNDL stock is valued at a price to sales multiple of 25x which is extremely steep.
The final verdict
When comparing these two cannabis companies, I believe Tilray is the better investment right now. Both companies are trading at high multiples, but Sundial is extremely overvalued. Further, Tilray’s leadership position and enormous size in the Canadian markets make it more attractive than Sundial.
SNDL shares were trading at $0.94 per share on Tuesday afternoon, down $0.03 (-3.51%). Year-to-date, SNDL has gained 98.52%, versus a 15.16% 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.
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