It's worth being a bit skeptical of extremely bullish calls about stocks you're thinking of buying, even if you want to believe them. At the moment, Tilray Brands' (TLRY -18.22%) stock sells for around $1.60 per share, but according to the average price target of Wall Street analysts, it could pop by more than 114% to top $3.43 within a year's time.
Considering the stock's decline of 43% over the past six months, it's clear that it isn't favored by the market right now. Is there any possibility that the analysts actually have it right anyway?
Don't bet on this stock to soar
Tilray is currently awash in issues that are unlikely to abate within the next 12 months.
First, the global cannabis industry continues to be in a state of turmoil if not outright recession, which directly affects Tilray. Major markets like the U.S. and Canada, the company's home market, are flooded with inexpensive marijuana, driving prices and revenue down and leaving businesses struggling to turn a profit. Tilray's quarterly revenue is down by 5% year over year, reaching $145 million in the most recent quarter, and it's only up by 24% over the last three years. That slow growth suggests the industry's problems aren't going away anytime soon, which is a big part of the reason most cannabis stocks have performed abysmally recently.
Second, Tilray just doubled down on the swamped Canadian cannabis market by acquiring Hexo, another Canadian marijuana supplier, in a deal that closed on June 22. The transaction was paid for in stock, with a total consideration of $56 million. If things go as planned, the purchase could add as much as $77 million to the company's top line annually and it would solidify Tilray's position as the market leader in Canada. But Hexo was deeply unprofitable before the acquisition and was also carrying $130 million in long-term debt. So it isn't reasonable to expect the market to react positively now that the acquisition is closed because Tilray will just be burning money faster.
Finally, Tilray's pathway to entering the U.S. marijuana market in the event that there is federal cannabis legalization is looking quite rickety. In August 2021 it purchased $165.8 million worth of convertible notes issued by MedMen, an American marijuana business. If legalization happens, Tilray has the right to convert the notes into a minority stake in MedMen, so it would in theory have access to the U.S. market. But legalization has remained elusive, and it appears to have no political momentum at the moment. What's more, MedMen is in even worse shape than Hexo because it's also extremely unprofitable and buried in $379 million in debt.
In other words, marijuana legalization in the U.S. might not even juice Tilray's stock that much, which makes it even harder to believe that its shares would soar anytime soon. Furthermore, while it's true that cannabis legalization in the European Union, where it also competes, could provide a significant boost, the process appears to be stalled after a moment of hopefulness in 2022. So there aren't really any big positive catalysts to look forward to at the moment.
The long term could still turn out favorably for shareholders
Given the above, it's almost certainly not possible for Tilray's stock to hit the average analyst target. The headwinds from the marijuana market alone are probably enough to dash analysts' hopes. But could some progress in realizing cost savings or increasing its efficiency rekindle investors' enthusiasm for its shares, even if it wouldn't power the stock to grow by more than double?
Probably not. Its quarterly cost of goods sold (COGS) and its quarterly operating expenses both remain elevated as a percentage of its revenue, and neither has shown signs of improvement in the past 12 months. In fact, its costs have actually risen in proportion to its sales.
It's probably best to avoid an investment in Tilray right now unless you're willing to wait several years for your move to pay off. Even then, there is no guarantee that it will ever be able to deliver on its ambitions to be the world's largest marijuana business. And remember, it's not enough to be large, because Tilray already is big. To deliver for shareholders, it would need to be both big and profitable, and there's simply no indication that the latter is within reach anytime soon.
