As the world's self-proclaimed leading medicinal marijuana business, Tilray Brands (TLRY -4.89%) has seen its stock reel during this bear market. Its shares are down 44.5% this year so far, whereas the market is down by a mere 20.4% with concerns about inflation running rampant.
But that dip could be a buying opportunity for investors who are willing to wait out a bit more pain as the company finds its footing in international cannabis markets. Is this a stock that's worth a purchase today, or are there better options?
Near-term headwinds make this a dicey purchase
There are a handful of issues affecting Tilray that should make investors pause, starting with its poor first-quarter earnings (perioded ended Aug. 31). Compared with Q1 of last year, the company's net revenue dropped 9% to $153.2 million in the most recent period. Though management is quick to point out that its revenue "remained strong" when adjusted for currency changes, that isn't exactly correct, as on a constant currency basis it made $166.5 million in the first quarter and just over $168 million in the same period of 2021. Aside from pointing to global macroeconomic disruption and perturbations in the market, leaders offered few explanations for the decline, which doesn't inspire much confidence, to say the least.
So even with the most favorable interpretation of the data, the company's top line is slightly sagging. Another problem is that its cannabis segment, responsible for 38% of its total revenue, is shrinking year over year, whereas its alcohol segment is expanding. That undermines the relevance of management's claim that Tilray has the largest adult-use market share for cannabis in its home territory of Canada, as the implication of the earnings data is that its market leadership isn't sufficient to drive consistent top-line growth. Furthermore, it still is nowhere near being profitable, and its quarterly net losses deepened by 90% to reach an outflow of nearly $65.8 million.
Thus, the obvious question for investors to ask is, "What's the point of spending money on gaining and securing market leadership if it's actually destroying shareholder value to do so?"
None of these problems are new for Tilray, as its quarterly revenue started to contract late last year and hasn't shown signs of a return to growth since. And without revenue growth or profitability, it's no surprise that investors would want to stay away.
Why this stock could still be looking lucrative in the long term
As regrettable as its Q1 performance may be, don't count Tilray out just yet, because the business could have a future that's way bigger than the results of any individual quarter. It has more than $490.6 million in cash and equivalents, so it isn't in danger of running out of money at its current burn rate. Plus, there's reason to believe that it could catch a couple of big breaks in its markets: cannabis legalization in the U.S. and the European Union.
With the Biden administration directing the Department of Justice to review the Schedule 1 classification of marijuana as of Oct. 7, there's yet another positive sign that recreational markets in the U.S. could soon become much larger. And thanks to its strategic agreement with MedMen Enterprises, Tilray effectively has the option to start competing in the country in the event of legalization.
Recent rumblings in the EU indicate that major constituents like Germany and Portugal are starting the process of decriminalizing and possibly legalizing marijuana for recreational use. Tilray is already positioned in the medicinal programs of both France and Germany, not to mention Italy and Poland. It's unclear exactly when legalization will advance from just an idea into law, and it's also foggy what the details of legalization in the EU will be. Still, pretty much any expansion of marijuana markets will be beneficial for the company.
In the long term, Tilray could theoretically leverage its recreational market leadership in Canada and its medicinal market leadership in the EU to drive major earnings growth after becoming profitable, and it's that possibility that should rest at the core of any argument to buy the stock. But, as that future is uncertain and not guaranteed to occur at all, it's best for conservative investors to avoid the stock. Even if you're a cannabis perma-bull, you might want to think twice before buying shares of Tilray, at least until it can demonstrate that it can make more money than it spends.
