Tilray Brands (TLRY) is having a rough time. Shares of the Canadian cannabis juggernaut have declined by 44.8% since the start of 2022. And per its latest earnings report for its 2022 fiscal year, published July 28, investors should expect the bumpy ride to continue, at least for another quarter or so.
But after that, things will probably start to look up for the company, potentially in a very big way. Let's analyze a pair of red flags and a couple of green flags impacting Tilray, so you can evaluate whether it's too risky to touch for your appetite or a tarnished growth stock that's worth gambling on.
1. Its home market share is slipping
The first red flag for Tilray is that its adult-use market share is getting eroded in Canada, which is its home market and largest segment by far. In its fiscal Q4 of 2022, it only held 8.3% of the Canadian market, a somewhat steep decline from the 12.8% it held in Q2. That didn't stop its fiscal 2022 net revenue from rising by 22% to reach $628.4 million, though it could spell trouble on the horizon if the trend continues.
What's especially concerning is that management offered no explanation for the drop, which constitutes an actual decline in annual net revenue from $222.9 million in 2021 to $209.5 million in 2022. Given that competition is likely to blame, investors can anticipate some margin compression moving forward, and that could drive the company's share price down even further.
2. Analysts are sour
Professional analysts and ratings groups don't have a favorable opinion of Tilray as an investment, and on July 29, an analyst at Benchmark downgraded it from "hold" to "sell," and others slashed their price targets for the stock in the days that followed. Right now, the average recommendation rating of analysts is a "hold," which typically points to a relatively pessimistic appraisal.
Of course, individual analysts are wrong all the time, and there's no rule that says a stock's rating is its destiny. But ratings are still metrics investors use to evaluate companies, so some potential buyers will likely be scared away, thereby keeping share prices marginally lower than they might be otherwise.
Now that you're up to speed on the issues Tilray is facing, let's take a look at a pair of green flags that might well be major catalysts for its stock to gain in value.
1. It could become cash flow positive in 2023
The first green flag for the stock is that management anticipates Tilray will start generating free cash flow (FCF) sometime in its 2023 fiscal year, which is already in progress. With cash flow to spare, the company will be able to pay down its debts or finance more acquisitions, not to mention pursue other avenues for growth. To get to that point, it plans to shave off $80 million in cost synergies over the next two years.
The savings stem from its recent purchase of convertible debt from HEXO, a smaller Canadian cannabis cultivator with which it forged a strategic collaboration in March of this year. Initially, management only expected CA$50 million in synergies from the collaboration, so the additional savings are a nice surprise, to say the least.
2. Cannabis legalization in the E.U. could be coming soon
Perhaps the largest green flag for Tilray's future is that regulators in the E.U. are working toward cannabis legalization at an unprecedented pace. On July 15, representatives from Germany, Malta, and Luxembourg issued a joint statement to the effect that cannabis decriminalization for nonmedical use is something that should be seriously considered. That could easily lead to full legalization in the short term if other countries in the region agree to reevaluate their cannabis use laws.
And for Tilray, which has major subsidiaries operating all over the E.U., especially in Germany, that would be huge. Legalization would instantly open up major new markets precisely where the company's assets are positioned to start penetrating them. It's entirely possible that its share price would shoot upward and continue to rise over time, thanks to the beneficial impact of long-term access to the newly opened recreational markets.