Stock bargain hunters are sure to hit on beleaguered marijuana company Tilray Brands (TLRY 0.28%) sooner rather than later. Operating in a crowded and very competitive market in its home market of Canada, Tilray also faces challenges including, but not limited to, black market competition and a significant lack of growth opportunities.
However, at times it's smart to be "greedy when others are fearful," in the words of investing rock star Warren Buffett. Maybe that's the case for Tilray shares right now, and there's an opportunity that few are realizing.
Weed-like growth
Tilray is one of the original marijuana majors that sprouted from Canada's full legalization of the drug beginning in 2018. In its early years, as was typical for the weed sector back then, Tilray wasn't shy about expanding through acquisitions and it's kept it up; it scooped up hemp foods specialist Manitoba Harvest in 2019 and fellow Canadian pot purveyor Hexo earlier this year, to name two of its many deals.
As a result, Tilray has become one of the largest marijuana companies by market capitalization. Even after its recent, scary price swoon -- by 40% so far this year, in sharp contrast to the S&P 500 index's 15% gain -- the company's market value is a cool $1 billion. This makes it easily the No. 1 Canadian pot stock on the scene.
NASDAQ: TLRY
Key Data Points
Yet bigger, as we all know, doesn't mean better. For all the money it's spent not only on acquisitions, but also earnest attempts at pushing into foreign markets such as Germany and Portugal, it isn't showing much growth lately. In fact, certain key metrics are declining -- such as revenue, which dipped by 4% year over year in the company's third quarter of fiscal 2023 ended Feb. 28, to just under $146 million.
Profitability remains uneven and elusive, and in the latest quarter Tilray booked a net loss of nearly $1.2 billion. The year-ago result was, more happily, a profit of over $52 million. But red numbers on the bottom line are the rule, not the exception, with this company.
A tight market next to a closed market
Tilray's management is resilient and is doing what it can to turn the business around. None of the company's acquisitions have come close to being game changers, but I can see the sound logic behind them.
There are clear synergies with Hexo and Manitoba Harvest. Purchases of breweries like Montauk Brewing make sense, too, as beer is an intoxicant and thus a weed-adjacent, complementary product (theoretically, anyway).
But this constant parade of acquisitions points out the fact that Tilray's core market is stagnant at best. There are scores of Canadian pot companies, all jostling to produce, distribute, and sell product to a country of less than 39 million souls (the population of its big neighbor to the south, meanwhile, tops 336 million). Legalization produced scores of cultivators and retailers, and there just isn't room for all of them.
And that great prize -- the vast and weed-happy American market -- is off-limits to direct sales from non-U.S. businesses, since the drug is still technically a controlled substance on the federal level.
It's possible to buy into future legalization. In 2021 Tilray acquired the majority of the senior secured convertible notes outstanding -- debt securities that transform into equity under certain conditions -- issued by troubled U.S. dispensary operator MedMen. That was two years after a splashy deal engineered by Canopy Growth to one day get its hands on multistate operator Acreage Holdings.
American pot legalization still feels a long way off, however; the current Congress is divided and divisive, while decriminalization lately doesn't seem like it's a great priority for even the most progressive lawmakers.
Going to the well... again
The latest body blow suffered by Tilray shareholders was the company's announcement in late May that it was, for the umpteenth time, tapping investors for more funds. This was effected through an issue of $150 million worth of convertible notes.
So Tilray is either loading up on debt, which harms the balance sheet, creates dilutive new equity down the road, or both. None of the above are beneficial for investors.
Surely it's admirable that management is figuring out ways to keep the business operational. Surviving and thriving, though, are two very different states of being. Tilray is very much stuck in the former mode with no clear way out, and as such remains avoidable as an investment, in my opinion.
