Marijuana stocks present a tantalizing growth opportunity for investors. Worldwide cannabis sales are forecast to rise at a blistering compound annual growth rate (CAGR) of 25.5% from 2022 to 2030, according to Grand View Research. Legal marijuana is thus expected to be the fastest-growing industry in the world over this period. The bad news for early investors is that this rapidly emerging space is fraught with risk.

Canada's Tilray (TLRY -1.68%) is a perfect example of this stark contrast between the industry's stunning growth potential and its outsize risk profile. Tilray's management team is predicting a staggering 69% CAGR in terms of annual sales over the next three years. That kind of eye-popping growth ought to be attracting investors in droves. Yet Tilray's shares have been steadily shedding value due to falling profit margins, the slow pace of legalization in key geographies, and repeated bouts of shareholder dilution. 

Is Tilray's stock a diamond in the rough?

Tilray has staying power

George Budwell: Admittedly, Tilray's stock is a high-risk equity. The cannabis value proposition has taken far longer than expected to materialize and there is no end in sight in regard to federal prohibition in the U.S. Tilray, as a result, has been a losing play for investors over the past few years. There are some solid reasons to think that the worst for Tilray may be over, however. 

Most importantly, Germany appears well on the way toward legalizing marijuana for adult recreational use. That's a big plus for Tilray for two key reasons. First, Tilray already sports a sizable footprint in Germany. Second, industry experts think that Germany's legalization campaign will spur similar movements across the continent. With operations in France, Italy, Poland, and Portugal, Tilray is well positioned to capitalize on a more cannabis-friendly environment in Europe. Europe, in fact, could become a major growth driver for the company within the next two to three years.

While Europe probably won't turn Tilray into a cannabis behemoth, this key commercial territory ought to transform it into a cash-flow-positive business. Tilray, in turn, ought to have the financial resources necessary to play the long game with the slowly developing U.S. market. The same simply can't be said for many of its closest competitors. 

Now, this investing thesis is definitely speculative in nature. A lot of pieces have to fall into place in the years ahead -- many of which Tilray has little to no control over. But the company does have a clear road ahead. Tilray simply has to take advantage of the opportunities as they become available.    

Dilution remains a risk for long-term investors

Keith NoonanWith Tilray stock trading down roughly 42% year to date and a staggering 98% from its lifetime high, the stock is already pretty beaten down. It's certainly possible that it will see some recovery and come to trade significantly above current levels, but that doesn't mean shares look like a steal at today's prices. 

In addition to acquisitions that have destroyed shareholder value and the Canadian cannabis market becoming increasingly competitive, stock dilution is another main reason why Tilray shares have performed so poorly following the company's public debut. The company has roughly quintupled its outstanding share count over the last five years, and there's a good chance that more dilution is in the cards.

Growers of varying sizes are flooding the Canadian market with product. That's pushing cannabis prices down, and Tilray has also been losing market share. While management is forecasting a shift into positive free cash flow generation in the current fiscal year, that target could prove overly optimistic. With total liabilities exceeding its cash pile by roughly 2.5 times at the end of last year even after a large stock sale, funding remains an issue for the company. 

Reliance on stock-based compensation to fund operations and issuing new shares to raise capital or pursue acquisitions will continue to dilute shareholders, and the company's push into markets outside Canada will require plenty of resources to be successful. Tilray's target for $4 billion in revenue in the 2024 fiscal year if marijuana receives federal legalization in the U.S. and Germany is intriguing, but the estimated timelines for major legislative changes in America could prove very optimistic. Even if its international expansion strategy moves forward, the company will still have to compete against established competition and black-market growers and prove it can avoid the type of oversaturation that has hurt business in Canada.