Tilray Brands (TLRY -2.52%) has been one of the hottest marijuana stocks of the past few years, and so it's a no-brainer why investors are wondering about its actual performance.
If you're like most investors, you're probably tired of hearing the standard disclaimer that past performance is no guarantee of future returns. But with Tilray specifically, there are at least a few lessons to learn from looking back, so let's dive in.
This stock was a phenomenal investment...for a while
If you invested $3,000 in Tilray in late June 2020, you probably felt like a genius. By mid-February 2021, your initial investment would've soared to a value north of $16,600 as meme stock mania prompted retail traders to bid its shares up. But what goes up as a result of hype must come down. And so Tilray's shares did, crashing spectacularly over the rest of the year, and then declining even further through 2022 and in 2023 so far. Now, your investment would be worth a grand total of $1,050, or 65% less than when you started your position. For reference, if you'd invested in an index like the SPDR S&P 500 ETF Trust, you'd have about $4,235, assuming you spent all the dividends immediately rather than reinvesting them.
So what happened to drive such a brutal and prolonged decline? Take a look at these charts:
Data source: YCharts
As you can see, it's almost the same chart displayed twice, with a short lag. As the market took stock of the company's efforts to grab market share, increase its cultivation and manufacturing capacity, and differentiate its brands, the shares rose in anticipation of the growth that would soon follow. Once the pace of that growth started to decrease, the market cooled to Tilray's chances of continuing to expand. Then came the bear market in 2022.
During the bear market, shares of unprofitable businesses suffered the most. The anticipated economic headwinds created by rapidly rising interest rates courtesy of the Federal Reserve pushed investors toward safer companies generating cash. Cash-flow-positive players wouldn't need to borrow money to continue to penetrate their markets, so the rising cost of borrowing didn't affect them much. But Tilray's troubles don't end there.
Right before the bear market started to slam the entire cannabis industry, as most of the competitors were and are unprofitable, the North American cannabis market's first big boom came to an abrupt end for another reason entirely. Put simply, there was (and continues to be) far too much supply of marijuana relative to the level of demand from consumers in both the U.S. and in Canada. Canada, Tilray's home market, experienced the cannabis glut first, and as one of the leading businesses by market share, it stood to lose the most. That put a major dent in its ability to signal to investors that better times were coming. With rivals flooding the market with product, it experienced a sharp decline in market share, which it had been planning to increase significantly.
It wasn't all bad
As bleak as the last few years have been, Tilray was busy with planting what might become the seeds of its long-term success. Between merging with other Canadian operators like Aphria, acquiring several smaller companies, including one in the U.S., and diversifying into the beer and liquor businesses, it has a much larger footprint than before. Over the past three years, its total assets rose by 130%, reaching $4.3 billion. Anyone who buys the stock today is banking on those assets being operable for the sake of profitable growth once the cannabis market isn't as swamped with cheap marijuana. In the meantime, the alcohol segment seems to be running smoothly, which suggests that management's judgment was sound when it opted to diversify away from focusing solely on cannabis.
It's also important to note that despite the fall of its stock, the company hasn't lost its market leadership. Its competitors haven't fared well either since 2020, and few of them can rival its hoard of $408 million in cash and equivalents, never mind its top line of $628 million in 2022. Plus, it's now a truly multinational company, with significant operations in North America and the European Union.
But you probably shouldn't buy this stock right now. The company is still deeply unprofitable, and its quarterly cost of goods sold (COGS) has actually risen as a proportion of revenue over the last three years. As long as marijuana selling prices remain low, its margin on sales will remain firmly in the red. Eventually, it might run out of money or be forced to downsize.
Of course, there's also the possibility of Tilray making a spectacular recovery, perhaps spurred by catalysts like full cannabis legalization in the U.S. or the E.U. Until that happens, however, buying it is betting on a dream of profitable market dominance that has remained elusive so far.
