With shares of Tilray Brands (TLRY -0.28%) down by 43% in the past three years but up by a stunning 84% in the last 30 days, it's no surprise why the stock is a topic of fierce debate among investors. What's more, with its latest earnings report suggesting that its cannabis business is recovering from a long slump while its alcohol segment is firing on all cylinders, it's reasonable to reassess its merits as an investment if you declined to invest in the past.
In that vein, it's useful to appreciate the arguments both in favor and against making an investment. So let's evaluate what the bears and the bulls are thinking about this stock.
The bears see dysfunction as the norm
The bear case against Tilray is less about a big picture where the company struggles to survive, and more about its plethora of ongoing sticky problems and seemingly insurmountable obstacles.
The central pillar of the bear case is its unprofitability, which has been a near-constant feature. Over the last three years, its annual gross profit margin has barely budged, and its cost of goods sold (COGS) has actually slightly risen as a percentage of revenue.
Those figures undermine management's overtures regarding the possibility and benefits of developing global economies of scale in cannabis cultivation, manufacturing, distribution, and retailing. They also suggest that the company's foray into making and selling alcohol, while apparently successful, hasn't been sufficient to fix the fundamental problem of spending more money than it brings in.
In that context, the company's recently announced purchase of eight beer brands from Anheuser-Busch InBev could be seen as a liability as there is a chance the brands are money-burning as well.
Another key element of the bear thesis is that big catalysts, like cannabis legalization in the U.S. and the E.U., have been stymied, as has cannabis banking reform in the U.S. Per management and the bulls, such legal breakthroughs are perpetually six months away.
But there is little indication of national legislative momentum toward legalization, nor much sign of an interest in adjusting regulations from the executive branch in the U.S. Nor does the E.U.'s sporadic and fragmented approach offer much in the way of concrete hope for the market to open soon. Given that Tilray is extensively positioned in the E.U., bears likely see its attempts to get established there in advance of legalization as an inefficient allocation of capital, if not verging on a wasted effort.
Finally, bears are critical of the company's growth strategy in its home market of Canada. Whereas management was once aiming for a market share of 30%, in the years following that goal-setting, Tilray actually lost nearly half of its stake. In the same period, it went on an acquisition spree, buying up regional marijuana operators -- but that didn't stop its revenue from stagnating in 2022 and early 2023 as the market was flooded with inexpensive weed.
And while it now looks like its revenue growth, as well as its market share, are recovering, the fact that the business has no competitive advantage to speak of means that bears are correct to say that history could easily repeat itself -- and perhaps soon.
Bulls are banking on a grand strategy
The bull thesis for Tilray rests on the eventual success and long-term benefits of the company's ambitious grand strategy.
Per that strategy, Tilray will spare no expense in scaling up its operations and grabbing market share in North America and the E.U., such that it can realize global economies of scale in production once cannabis is fully legalized in those regions. In particular, entering the U.S. market will be a major watershed moment, because it would likely lead to at least a few years of rapid top-line growth.
Once that part of the plan is in action, it should subsequently cement its market share while also bolstering its margin by building brand loyalty, slowly developing a competitive advantage other players can't easily mimic. Then, it'll be a free cash flow (FCF) machine that'll have plenty of money to return to shareholders while also investing in further growth. And it'd probably (still) be the world's largest marijuana business at that point, too.
Implementing the grand strategy could take between five and 10 years once the legal barriers fall. But the company already has quite a few of the pieces of the plan staged and ready for when the laws allow. It has cultivation and manufacturing facilities set up in Portugal to avoid tariffs for importing cannabis into the E.U., as well as medicinal cannabis subsidiaries set up in most major European markets like Germany and France.
Likewise, it has a strategic agreement that'll enable it to enter the U.S. market quickly upon legalization, and its alcohol businesses are building distribution networks that could come in handy for cannabis too.
So at the crux, the bulls are anticipating that soon enough Tilray's next leg of rapid expansion will occur. And with its latest purchase of beer brands from Anheuser-Busch, which could generate $250 million in craft beer sales annually, that leg of growth could be imminent regardless of what's going on with its cannabis operations.
The skeptics might not ultimately be correct
It's hard to dispute the issues described by the bears. Tilray simply can't work around cannabis being illegal in its target markets, and waiting for that to change could continue to be agonizing for shareholders.
At the same time, there is nothing fundamentally wrong with the business, as the bears see it. Profitability could come with time, even without widespread legalization. And there's no rule that says competing in medicinal marijuana markets while waiting for recreational marijuana to be legalized is inherently unprofitable or low-growth.
Long term, the bulls are more likely to be proven correct. But the stock could be a volatile pick in the interim, and it is doubtlessly a high-risk investment. If you're comfortable holding your shares for a long time and seeing them potentially fall -- perhaps by quite a bit -- buy away. Otherwise, look elsewhere; there's a ton of uncertainty in the cannabis industry, and it won't be clearing up for a while.
