Ever since the legalization of recreational cannabis for adults in Canada nearly four years ago, I've maintained my stance that the marijuana stock market would ultimately be characterized by a select handful of big winners and scores of losers. And as things stand now, this prediction appears to be spot on.
What's important to understand is that the global cannabis market is slowly marching toward a couple of key inflection points within the next two years. These upcoming landmark events ought to provide clear insight into the industry's future winners and losers.
My view is that Tilray Brands (TLRY 4.97%) arguably has the best shot within its immediate peer group of benefiting from the market's rapidly changing dynamics. Here is a quick rundown of the headwinds and tailwinds that make Tilray a possible homerun stock for investors willing to buy and hold for the long term.
The state of play in cannabis
Four core issues will continue to shape the legalized marijuana industry in the near term:
- The Canadian cannabis market is currently flooded with far too many licensed producers, processors, and sellers -- more than 880 at last count. This sea of competitors has led to margin compression across nearly every product category, vast oversupply within the Canadian cannabis market, and mounting losses for most of the industry's top players.
- Canada's smaller craft producers have been steadily gaining market share in recent quarters. This trend has forced bigger entities like Tilray to slash prices, which has put even more pressure on profit margins across the industry.
- The high-value U.S. cannabis market -- estimated at nearly $100 billion in sales by 2030 -- may not see major reforms at the federal level until the next decade. That's terrible news for Canadian cannabis companies that have bet the farm, so speak, on this seminal event.
- Germany's march toward adult-use legalization is widely expected to kick off marijuana reform across Europe within the next two to three years. Companies with ongoing European-based operations, in turn, ought to enjoy an all-important first-mover advantage on the continent.
Tilray's future looks bright
Tilray is in an enviable position for several reasons:
- Tilray already owns the largest share of Canada's retail marijuana market, and it has designs on growing its share to nearly a third of the Canadian market in the near future.
- Although the company's market share in Canada has been shrinking lately, this unfavorable trend ought to reverse course sometime soon because of the company's aggressive pricing and education campaigns.
- Tilray sports the largest medical marijuana operation in Germany by a wide margin.
- Thanks primarily to operational synergies from its acquisition of Aphria, Tilray has been able to post net income for two straight quarters this year.
- Meanwhile, the company's chief competitors have continued to report staggering net losses, on a quarterly basis, of late.
- While Tilray does have a toehold in the U.S. market, it didn't go hog wild on this high-risk venture. The same can't be said for the company's main rivals in Canada.
The big picture
What does this all mean? Although Tilray is far from a rock-solid business because of the tough operational environment for cannabis in general, the company is starting to separate itself from the pack.
In Canada, the company is poised to benefit in a big way from the country's ongoing "right-sizing" movement. Tilray's girth, after all, should give it a leg up in terms of several key operating efficiencies as the market slowly but surely becomes less crowded. Most importantly, though, Tilray could see a massive windfall from Germany's legalization effort. A legal German market would go a long way toward helping Tilray achieve its goal of generating $4 billion in annual sales by the end of fiscal 2024.
Overall, I believe Tilray has laid the foundation to become a global leader in cannabis -- putting it on track to achieve tens of billions in annual sales by 2030. I thus expect Tilray's shares to undergo a parabolic growth spurt at some point within the next 18 months. This growth spurt will be catalyzed first by a stabilization in the company's domestic market share, followed by a return to market-share growth within the next six months. Second, Tilray's German enterprise will undoubtedly pay enormous dividends for shareholders once the country officially legalizes recreational cannabis -- an event that could happen as soon as next year.
All that being said, Tilray's stock probably hasn't found a bottom in the near term. As such, I'd caution potential investors against buying a large position in this speculative pot stock right now. A wiser course of action, in my humble opinion, is to employ a dollar-cost averaging strategy with Tilray's shares over the next several quarters. The company's true value proposition, after all, probably won't become readily apparent to Mr. Market until the Canadian cannabis industry consolidates further and Germany formally green lights adult-use cannabis for recreational purposes.