With shares of Tilray Brands (TLRY 6.98%) down by more than 51% since March 2022, smart investors are naturally leery about investing in it. Yet Wall Street analysts' average price target for the cannabis company implies that its stock will rise by 79.7% in the next year.
So why is there such a disconnect between what the analysts think will happen and what has recently happened? And should you as an investor pay heed to those ambitious estimates, or would you be better served to stay on the sidelines for now?
It's taking a beating, and things aren't exactly looking up
A few problems are driving Tilray's decline, and none of them are on the verge of improving.
One issue is that its marijuana market share is collapsing in Canada, its home market. In its fiscal 2022 first quarter (which ended Aug. 31, 2021), it reported a share of 16%, and management said its goal was to reach a share of 30% by 2024. But in its fiscal 2023 Q1, it said that it only held an 8.5% market share, indicating that its growth efforts have effectively been stymied, and its fiscal Q2 update showed a small amount of additional erosion. And in its fiscal Q2 report (which it delivered on Jan. 9), it revealed that its revenue had dropped by 7.1% year over year to $144.1 million. Plus, it still isn't consistently profitable.
As such, there's no way to argue that Tilray management is choosing to operate the company at a slight loss so as to focus on growing the top line more rapidly -- because it's not growing. And Tilray shares have gotten punished in this bear market -- just one of the many formerly favored unprofitable growth stocks to become a downwardly mobile underperformer. But even if the bear market ends tomorrow -- and it probably won't -- Tilray has another problem: The cannabis market is in bad shape.
Cannabis companies in North America are facing a swamped market for their products, which is driving average selling prices down and making it harder to maintain decent profit margins. By some estimates, wholesale prices of marijuana in Canada fell by 40% in 2022, and while prices may soon start to recover, there's a solid chance cannabis stocks will remain stagnant for a bit longer. And while Tilray is a highly internationalized business, with operations scattered around the globe, if it can't hold down its position in its home market, that naturally raises questions about its ability to compete elsewhere.
So Tilray's shares aren't likely to bounce back just yet.
The future could still be quite bright
Given the numerous issues Tilray faces, it's quite hard to see why the analysts are so bullish about the stock this year. It does have $433.5 million in cash and equivalents on the books, so it's remotely possible that Tilray could acquire a marijuana or alcohol business, and the market might receive that news enthusiastically. But that chance isn't tangible enough to warrant an investment right now.
Nonetheless, in the long term, it's easy to envision the company being quite successful thanks to its massive scale, as its efficiencies may allow it to significantly drive down its cost per gram of cannabis produced. In the last three years, its quarterly cost of goods sold (COGS) expressed as a proportion of quarterly revenue fell by 34.6%, while revenue climbed 27.1%, so there's already some evidence that scaling up further could eventually work out. Likewise, the Tilray of the future would be a remarkably geographically diversified business for which failure or stiff competition in one market wouldn't necessarily be a major impediment to the company's overall health.
That's no small advantage, as it's currently spread across several continents and a smattering of countries, each of which is a self-contained market with particular laws about cannabis cultivation, sale, and use that make it difficult for new players to enter the market. In essence, the factors that make Tilray a bit operationally unwieldy at the moment (not to mention a bit risky for investors) could become its strengths in due time.
But that doesn't mean you should buy the stock today. If it's possible for Tilray to make its multinational business model work for investors, it has a long way to go in order to prove it. And given the headwinds in the cannabis industry, the curse of being a growth stock during a bear market, and its struggle to maintain market share in its home market, its shares probably won't be winners this year, even if Wall Street analysts say otherwise. Keep an eye on this company over the next year, and circle back to reconsider it as a possible buy if it starts looking like it's on track to become profitable.
