Few cannabis companies are as internationally relevant as Tilray Brands (TLRY). Based in Ontario, Canada, the business was once hailed as the largest marijuana operator in the world by revenue. But now, with its sales tumbling and cannabis markets showing signs of saturation, the stock in late December set a new all-time low, and its future is in question.
Will Tilray's business take off, driving its stock's rally, or is it doomed to keep declining? Let's weigh the arguments in favor of each of those outcomes.
The bull thesis will take time to prove
The bull thesis for Tilray has two pillars: diversification and scale. While the company was originally just a marijuana business, its operations have become significantly more diversified following a few strategic acquisitions and its merger with Aphria in 2021. Now the business includes the cultivation and distribution of medical cannabis products, the production and sale of alcoholic beverages, and wellness products based on cannabis. That diversification is a big reason its trailing 12-month revenue grew by 55% over the last three years, and it's also why a pullback in the cannabis market might not hurt Tilray as much as it would hurt its competitors.
Now, with a top line totaling more than $628.3 million in its fiscal 2022 (which ended May 31), the company's path to more growth looks a lot like the path it has already trodden. In short, Tilray is a global-scale company that has the potential to bring in global-scale profits, and its sheer size might also eventually produce economies of scale that drive its costs down, too.
Presently, it grows and manufactures its products on multiple continents, and it distributes to North America, South America, Europe, Australia, and other regions, too. As those markets expand and marijuana legalization occurs in more nations, there's no player that's better positioned to benefit than Tilray. For example, it currently has the leading market share for medicinal cannabis in the E.U., which will (in theory) help it capture adult-use sales in any markets that legalize recreational use of cannabis soon.
The bear thesis is more grounded in reality for now
The most straightforward reason to avoid buying Tilray stock is that the company faces ongoing competitive issues and headwinds that won't be dissipating anytime soon.
First, there's the troubling downward trend of the company's market share in its home market in Canada. In October 2021, it held a market share of around 12% in the adult-use cannabis segment. But in its fiscal 2023 second quarter -- results for which it delivered in early January -- its adult-use market share was only 8.3%. This indicates that competitors are luring away its customers.
Another issue is that Tilray's hopes for growth partially rest on its cannabis operations in the E.U., where it has a significant presence in Germany and Portugal, as well as smaller footprints held by subsidiaries in Poland and Italy. Recreational marijuana isn't legal in those markets, even if it might be sometime soon. So, its growth will be somewhat constrained there for a while longer, at least. Even in its legalized markets, it's currently taking steps to trim costs by reducing production output, which is not a favorable sign.
A separate but related problem is that its attempts to scale up its beer business in the U.S. may encounter trouble. Tilray brought in $21.4 million from those sales in fiscal 2023 Q2, but it's unlikely that the company has any competitive advantages that might help it capture a significantly larger share of the U.S. craft beer market, which is quite crowded. That makes further growth for the company in that area hard to count on.
What's the best play?
Tilray's distant future is uncertain, but the bears are right about its dim near-term outlook. Also, it only has $433.5 million in cash on the books after it burned through $211.3 million in its fiscal 2022. Therefore, given that it's unprofitable, it will need to either trim its operations until they're cash-accretive or raise more money within the next few years to keep the show going.
In other words, Tilray's potential to grow is going to bump up against its hard financial constraints soon unless it finds a way to lower its costs or significantly improve its bottom-line results. If it succeeds, it'll likely continue to be one of the world's dominant cannabis businesses before the end of the decade, but the risks that it will fall short and leave shareholders in the lurch make this stock a bit too dangerous to approach for the time being.
