Tilray Brands (TLRY -4.89%) has had a year to forget in 2022. Thanks to the ongoing bear market in growth stocks, coupled to the hurricane-force headwinds hitting the cannabis industry of late, Tilray's shares have lost a jaw-dropping 58% of their value this year.
Is this precipitous drop in the cannabis, alcohol, and wellness company's shares a buying opportunity? Let's dig deeper to find out.
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Tilray's diversification effort hasn't landed with investors
Tilray's stock has been under heavy pressure this year in response to its shrinking share of the Canadian cannabis market, its continued expansion into arenas with uncertain payoffs such as craft beer and spirits, and its inability to post positive free cash flows on either a quarterly or annual basis.
The crux of the situation is that the highly competitive nature of the Canadian cannabis market has forced Tilray -- among others -- to diversify into broadly similar areas of the consumer-packaged goods industry, such as alcohol. While this strategic move does seem wise considering the unfavorable dynamics unfolding within the Canadian marijuana space right now, this diversification process hasn't been a hit with investors for two overarching reasons.
First up, Tilray's expenses have ballooned in the wake of its twin acquisitions of SweetWater and Breckenridge. Second, this move into alcohol may be a key reason behind the company's marked slippage in the Canadian cannabis market over the past year. Since the middle of 2021, Tilray has lost nearly 50% of this key market. Although the shift to high-quality, uber potent craft brands by consumers has certainly played a role in Tilray's sinking market share, the fact of the matter is that the company might have been able to ward off up-and-coming competitors like OrganiGram Holdings if its sole focus was cannabis.
What is Tilray's end game?
Tilray's move into alcohol may be unpopular with investors, but the company is arguably on the right track. What's important to understand is that the name of the game in cannabis right now is survival.
As the industry matures, the number of players in the game will certainly shrink due to a mix of bankruptcies, buyouts, and mergers. By 2030, the global cannabis industry is thus widely expected to be dominated by three to perhaps five large-cap companies (based on the historical trajectory of similar industries like alcohol, beverages, and tobacco).
This consolidation phase is likely to be fueled by key regulatory developments such as the rescheduling of cannabis at the federal level in the U.S., the entrance of additional mega-cap beverage, tobacco, and pharmaceutical companies into cannabis, and a steady rise in demand across the globe.
Tilray's braintrust thus seems to be positioning the company to capitalize on these longer-term catalysts. Alcohol, in short, is probably little more than a side venture designed to get the cannabis giant to the forthcoming golden age of cannabis.
Is Tilray stock a buy?
OK, Tilray's near-term financial picture isn't great. That much has been established. And alcohol isn't going to be a cure-all for the company. Let's be upfront about that issue, too.
So why would Tilray stock be worth buying right now? Tilray has a prime competitive position in the global cannabis landscape and an immense amount of staying power thanks to its recent pivot to non-cannabis revenue streams.
Let's break these points down further. Most analysts expect global cannabis sales to top $248 billion by the end of the decade. With an international footprint that spans 21 countries at present, multiple jumping off points in play for when U.S. sales become federally permissible, and an ongoing build out of a diverse and stable revenue stream, Tilray looks like a strong contender to be in that small group of companies vying for top-dog status in the global cannabis industry come 2030.
What does this all mean? With a minuscule 5% share of the global cannabis market by decade's end, Tilray's market cap could realistically grow by an astonishing 20 times over the next seven years. This eye-catching valuation estimate isn't composed of fairy dust and unicorns, either. As things stand now, there's little doubt that cannabis will eventually become widely accepted as both a recreational and medicinal product across the globe. Tilray, for its part, simply has to stay in the game to deliver life-altering gains for early shareholders.
So, all things considered, Tilray stands out an as intriguing growth play for investors with a long-term outlook.
