Green Thumb Industries (OTC: GTBIF) and Aurora Cannabis (NASDAQ: ACB) are both popular cannabis stocks, but they compete in different markets and face different sets of challenges, so it's very likely that one will be a better investment than the other this year.
But don't take that to mean it's a toss-up as to which has a better chance at performing well. There's a clear winner here, so let's look at both and see why that's the case.
Green Thumb is making moves in its markets
Green Thumb has a few catalysts in the works this year. First, there's the opening of a few new state-level recreational marijuana markets in places like Virginia, Minnesota, and Ohio, where the company already has medicinal sales operations. Accessing the newly opening markets will thus be relatively easy, boosting its revenue a bit higher, as it adds locations in other markets like Florida and Nevada. Wall Street analysts on average predict that revenue for 2024 will be 6.5% higher than 2023, topping $1.1 billion. The question is whether the growth will be worth a potential hit to its narrow profit margin, which was just under 4% as of the third quarter of 2023.
It's also possible that 2024 will be the first year that Green Thumb reports positive free cash flow (FCF) -- what's left of cash flow after spending on business investments and capital expenditures -- for the entire year. That'll be a strong point in its favor, as investors will be able to have some confidence that the business is actually capable of consistently producing more money than it spends. In the most recent quarter, it reported $6.6 million in FCF, so it's important to recognize that it wouldn't take a very big setback or change to its unit economics to rain on the parade.
What will be impressive is if it manages to generate more cash than before while adding to its top line by penetrating new markets. It's hard to imagine a scenario that's much more bullish than that, as it implies the ability to respond to a high level of demand while remaining profitable, reducing the risk of investors taking heavy losses when growth headwinds inevitably arrive. But for now, such victories are only hypothetical.
Aurora's efficiency drive is wrapping up, but growth will be the next challenge
The thesis for Aurora Cannabis climbing in 2024 is quite simple: With a huge multiyear cost-cutting campaign winding down, the company will be approaching profitability and thus one step closer to returning to sustainable growth. It may even achieve its goal of generating FCF before the end of the 2024 calendar year.
During the past three years, its total quarterly operating expenses as a share of revenue have fallen from above 125% to around 51%. Those gains came at a steep toll, with management opting to close down many production facilities and consequently miss out on some revenue. Its quarterly sales fell by 3.5% during the past five years, leaving it with just over $47 million in sales in its fiscal second quarter of 2024, ended Sept. 30. Now that those losses are in the past, so the argument goes, the only way the stock can go is up is if growth accelerates.
There's reason to believe that might be possible. The Canadian cannabis market where Aurora competes is starting to show a few signs of recovery after a glut that drove selling prices down and crushed producers' margins. While significantly higher selling prices are unlikely in the near term, because demand won't accelerate sharply, the worst appears to be largely over.
The next piece of the puzzle will be how to actually gain market share, as the business doesn't have the advantage of new geographical segments of the market opening like Green Thumb does.
Which case is stronger?
Green Thumb Industries is more likely to see its stock rise this year than Aurora Cannabis. Despite Aurora's considerable progress in reducing its inefficiencies, growth remains a challenge, and the Canadian market will not offer many opportunities to capture growth without taking it from a competitor.
At the same time, Green Thumb is sitting and waiting for the customers to shop at its stores in places that just legalized recreational cannabis. And it's taking in more money than it spends, so it definitely won't need to issue new shares or borrow more to pay for expansion into new locations. In a nutshell, it's just in a stronger position as a result of its geographical footprint, so it's the better option for now.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Green Thumb Industries. The Motley Fool has a disclosure policy.
