Since the second quarter of 2021, cannabis stocks have seen challenging days without any progress on federal reforms.
Even the slightest hint toward legalization causes marijuana stocks to skyrocket. That is what happened on Oct. 6 when President Biden announced a pardon for federal marijuana possession convictions. He also proposed starting a review to remove cannabis from the Schedule 1 drug list. This announcement sparked hope that cannabis reforms could take a positive turn.
Canada-based cannabis firm Tilray Brands' (TLRY -5.17%) shares rose 31% on Oct. 6 but plummeted the next day after the company reported its first-quarter fiscal 2023 results. Let's see whether now is a good time to buy Tilray stock.
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Mixed quarterly results for Tilray
Tilray's net sales for the first quarter of fiscal 2023 declined 9% to $153 million, owing to demand-supply imbalances in Canada. The net loss widened to $66 million from $34 million in the prior year's quarter. However, the company's 14th straight quarter of adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) profit came in at $13.5 million.
Management remains optimistic about achieving $70 to $80 million in adjusted EBITDA and being free-cash-flow-positive this fiscal year (set to end May 31, 2023).
Tilray has high hopes for the U.S. cannabis market, but...
Even if cannabis is legal in Canada, the market is modest. Canadian pot growers have more opportunities to expand their business in the U.S. and Europe but only after marijuana legalization. Tilray is better positioned in the U.S. market after acquiring SweetWater Brewing, Breckenridge Distillery, and Manitoba Harvest acquisitions, all of which are EBITDA-profitable.
That said, the domestic pot companies stand to gain first if and when the U.S. legalizes cannabis. Tilray may see some difficulties bolstering its position. Yet, Tilray aims to achieve $4 billion in yearly revenue by the end of fiscal 2024. CEO Irwin Simon believes the U.S. cannabis market to be a "$100 billion opportunity" that could help the company hit this target.
President Biden's announcement might have come as a spark of hope for pot investors. But reclassifying marijuana won't necessarily make it legal. Thus it won't benefit Canadian pot companies directly. Yet, it could be a slower move toward decriminalization. But these federal reforms could take years before they become law. So, Tilray has a better chance of growing its business in Canada and Europe for now. It might potentially expand into other markets or buy more cannabis companies.
Tilray already has a strategic partnership with Hexo (HEXO), a cannabis firm located in Canada, to repay its $173 million convertible debt. In exchange, Tilray gains the chance to buy a major stake in Hexo at a later date. Tilray will also get 5% annual interest on the loan, along with $18 million in annual consultancy services.
The long-term outlook
Some may argue that Tilray's management is overconfident, the $4 billion sales target by 2024 appears to be a tad ambitious. But I have faith in Simon's leadership. He has demonstrated his ability to manage Aphria since becoming CEO in 2019. Until the merger with Tilray, Aphria was consistently EBITDA-profitable. Post-merger, a bigger company has more challenges.
But don't forget that Simon started and ran the packaged-goods company Hain Celestial Group for 25 years. And a merger as big as Aphria-Tilray usually takes time to show its full potential.
If all of Tilray's strategies pan out over the years, it is capable of becoming a globally successful cannabis player. Though that might take years, if not a decade.
According to Allied Market Research, the cannabis industry is one of the fastest growing in the world, estimated to be worth $149 billion by 2031. Tilray's stock is down 77% from its 52-week high. When the market matures, Tilray might be expensive.
It is not too late for long-term investors to get a small stake in Tilray right now. However, keep in mind that marijuana investments are risky. Hence, it is wise to diversify your portfolio with high-quality stocks from several sectors.
