If you're a fan of Warren Buffett's long-term approach to investing, it pays to know what the Oracle of Omaha might think about the stocks of today that you suspect could be the mega-winners of 20 or 30 years from now. Given that, the Canadian marijuana market leader, Tilray Brands (TLRY +0.22%), is an obvious candidate for consideration.
Buffett hasn't ever invested in cannabis, though. Nor is he typically fond of growth-phase businesses like Tilray, which operate in immature industries where the competitive landscape is rapidly shifting and there are few constants for investors to rely on. So would he be interested in buying shares of Tilray, or are they not his cup of tea? Let's answer this question by looking at a company we know Buffett actually likes to see if there are any similarities.
NASDAQ: TLRY
Key Data Points
Could Tilray eventually be as successful as Coca-Cola?
To determine Buffett's likely stance on Tilray, let's first look at one of his well-known favorites, Coca-Cola, (KO +0.65%).
Buffett likes Coca-Cola stock so much that it accounts for around 8.4% of Berkshire Hathaway's portfolio, which makes it the third-largest holding in the conglomerate he leads. It's not too surprising why, either. The company's beverage brands are among the most well-known in the world, and consumers have developed strong preferences about the flavors of its drinks, leading to customer loyalty even in the face of an abundance of competing products with largely similar tastes, marketing, and pricing. Its brand power is therefore an economic moat that helps it to retain market share for years on end and also its profit margin -- and Buffett loves moats, as they're a form of competitive advantage.
Furthermore, the fact that demand for Coke and similar products isn't growing by much over time doesn't dissuade the Berkshire CEO. Coca-Cola doesn't need to invest much of anything into research and development (R&D) to develop new products, because it can just keep selling its same old drinks to the same global customer base at roughly a similar rate as it did in prior years, growing its net income all the while via cost discipline. Moreover, its profitability is rock solid over time, with barely any change to its gross margin in the last 10 years, so there's little risk of financial deterioration that would endanger its ability to keep paying a dividend to its shareholders.
So does Tilray have anything in common with what Buffett probably likes about Coca-Cola, or could it in the future? In a word, yes.
While Tilray competes in the cannabis arena instead of the soft drink market, the two aren't as different as they might seem at first. People have preferences about which strains of cannabis they consume, as well as preferences for which formats, whether it's via vaporizers, edibles, or dried flower. That supports the idea of a company eventually owning multi-nationally distributed brands that garner enough customer loyalty to maintain a steady level of demand over the course of years.
Likewise, it's possible to envision a future in which marijuana businesses reach a steady state where their margins are stable, and where they generate enough cash flow to pay a dividend that rises slowly over time, like Coca-Cola's (it's risen by 73% over the past decade). The trouble is, based on his historical investing principles, where Tilray is today is very different from where it would need to be for Buffett to find it appealing.
NYSE: KO
Key Data Points
It might take a (long) while for Buffett to come around
It's very unlikely that Buffett would be interested in buying Tilray today.
It's unprofitable ($66 million loss for the recent quarter), but more importantly, its market share is anything but stable, which suggests it doesn't yet have significant customer loyalty for its products. In Q1 (ended Aug. 31), its share of the recreational cannabis market in Canada, its home base, had fallen by nearly half compared to just over a year ago, now standing at 8.5%. It's almost impossible to imagine a similar occurrence happening to a juggernaut like Coca-Cola, even looking back more than a decade in its history.
At the same time, Tilray's quarterly gross margin isn't very consistent, and it isn't showing any clear trends upward or toward more stability over the last three years. When paired with the market share erosion, it's pretty clear that the company doesn't have any kind of economic moat, nor does it have any tangible competitive advantages that'd attract Buffett.
Still, those issues aren't intractable, and they're unlikely to be permanent. Brand loyalty can take years to build, and Tilray is in the early innings of its time as a leading competitor in the industry. But it'll take a lot of other changes before Buffett might invest, and most of those changes fall under the banner of transitioning from a growth-phase business to a mature company like Coca-Cola. Such a transformation will probably take at least a decade for Tilray to undergo before Buffett might have enough evidence of its quality.
Until then, you aren't obligated to make the same choice as Buffett likely would, though you should note that his approach is designed to minimize risk. And at the moment, investors in Tilray face a lot of risks stemming from its ability to keep expanding globally while burning cash and its top line slipping all the while.
