If you're investing in the cannabis industry, you need to be aware of how overly bullish some companies and CEOs are about their prospects. Tilray Brands (TLRY +4.42%) falls into that crowd, pumping itself up to be a $4 billion business in just a few years. It wouldn't be such a stretch if it even generated $1 billion in revenue in the past year, but that isn't the case.
There are warning signs about Tilray's promises and forecasts that investors shouldn't ignore. The most recent one came with it overemphasizing its influence in Germany. And it all leads to the same problem.
NASDAQ: TLRY
Key Data Points
Management is overestimating the company's position in the industry
A big red flag for me with Tilray is how the company is grossly exaggerating its stature in the industry. One of the most surprising predictions their CEO Irwin Simon made recently was suggesting that no other cannabis company would be in as strong of a position to grow its business when legalization takes place in Europe and the U.S. It's a startling assumption to make, given that while Tilray may be the largest cannabis producer in Canada, there are multiple multi-state operators in the U.S. that generate more revenue than it does and have a huge head start on the market there.
Another example of Tilray's overconfidence is evident through a press release it issued earlier this month where it said it initiated a roundtable with German regulators relating to the legalization of adult-use cannabis in that country. In the statement, Tilray called itself "a trusted partner to government regulators." However, officials from the German government stated that the press release was not correct and said the meeting was just a "one-time conversation." A spokesperson stated that "The content of the press release is just not correct. We are not downplaying the meeting, because there is no cooperation and there will be none either with Tilray."
It's an embarrassing situation for Tilray that further calls into light just how much investors can truly trust the company, its management, and its forecasts.
Investors should be extremely cautious with Tilray
For Tilray to deliver on its promises, especially on its revenue guidance, too much would have to go in Tilray's favor. It would need to dominate the industry in Canada and achieve at least 30% market share per its estimates (currently, it's less than 10%), the U.S. would need to legalize marijuana, and there would also need to be progress on legalization in multiple European markets.
Any one of those developments looks like a long shot at this point, as legalization is something that's out of the company's hands. And while they could potentially achieve a 30% market share in the Canadian market, it would likely result in many acquisitions and significant dilution for investors. And Tilray is already burning through money as it is with its operating activities resulting in a $177 million outflow of cash over the past 12 months. Tilray has a lot of work to do to hit its target of $4 billion in sales and make its business a tenable investment. Over the trailing 12 months, it has incurred net losses of $477 million on revenue of $628 million.
You're better off avoiding Tilray
Year to date, Tilray's stock has fallen 54%, which is worse than the Horizons Marijuana Life Sciences ETF (it's down 47%). But there's more danger ahead for the stock because the closer that the company gets to 2024 and its $4 billion revenue target without significantly increasing its top line, the less likely it will be that investors will believe its guidance. And it could be a matter of time before management pulls that forecast entirely.
A management team that's overconfident and too optimistic can be a dangerous one to trust, and that's why investors are better off looking at other cannabis stocks to invest in than Tilray.
