Tilray Brands (TLRY -2.20%) and other Canadian cannabis companies have struggled to generate growth, as competition has been rising over the years and there hasn't been enough demand to go around. And there hasn't been any significant progress in legalizing marijuana in the U.S. and other parts of the world to help up open new growth opportunities.
But as gloomy as things might look for some pot stocks right now, they could be especially bad for Tilray.
Investors should prepare for the inevitable
On Jan. 9, Tilray released its second-quarter earnings numbers, which failed to impress. Net revenue of $144.1 million for the period ending Nov. 30, 2022, was down 7% from the prior-year period as the company's top line continues to struggle. And while Tilray will boast of it being the 15th straight quarter of positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), it also reported a hefty net loss of $61.6 million.
It only confirms what investors should be getting ready for: the moment that management declares its overly optimistic and ambitious revenue target of $4 billion by 2024 is not attainable. It was a forecast that looked unrealistic in 2021, and now it looks next to impossible, barring some significant acquisitions.
On the company's most recent earnings call, CEO Irwin Simon did state that the forecast was based on expectations of marijuana legalization in not just the U.S. but in Europe as well. But at the same time, he still didn't rule out the possibility of still reaching that forecast, stating, "if legalization happened tomorrow, that's possible."
He also suggested that by diversifying, hitting the revenue target could remain a possibility. One area he identified as an opportunity was potentially growing fruits and vegetables.
And so while it appears Simon is becoming a bit more pessimistic about the outlook for legalization, it doesn't look as though he has given up on the revenue goal just yet. But it may only be a matter of time before that changes.
Why the stock could still fall from where it is now
Based on its price-to-sales ratio, Tilray isn't a cheap buy compared to other pot stocks in the industry:
TLRY PS Ratio data by YCharts
Its valuation is in line with rival Canopy Growth, but it trades at a premium compared to Aurora Cannabis and SNDL, which have struggled with generating growth as well. Canopy Growth, however, has the advantage of having over 1.1 billion Canadian dollars in cash and investments on its books and having the backing of beer maker Constellation Brands. Tilray doesn't have that same safety net -- its cash and marketable securities totaled $433.5 million last quarter, and it lacks a big partner.
If investors start valuing Tilray as a riskier stock, around where Aurora and SNDL trade at, there could be significantly more downside risk for the cannabis company. And that could happen if investors lose trust in Simon and his overly optimistic projections.
Tilray investors should dump the stock before things get worse
In the past year, Tilray's stock has lost more than half of its value. If Simon announces a lower forecast for fiscal 2024 this year, that could lead the stock into a deeper tailspin. But even if he opts not to give a forecast, investors will see the writing on the wall this year. If the company's top line continues to fall, a formal announcement would arguably not even be necessary to state the obvious, which is that $4 billion revenue forecast is not a realistic one.
Without the potential of some attractive growth prospects, there would be little reason to expect much bullishness behind the stock. This is why Tilray could be destined to have another tough year in 2023.
