Tilray Brands (TLRY +1.27%) has been diversifying its business over the years. While its core operations revolve around cannabis, it has four different segments that contribute to its top line, including alcohol. The craft brewing market is one that it has been focusing on of late because it not only diversifies the business but it gives the Canadian company a way to expand its U.S. operations.
Earlier this month, Tilray announced the acquisition of several different brands that will make its alcohol business even bigger and stronger. And that's great news for investors.
Tilray to expand its beverage business
On Aug. 7, Tilray said that it would acquire eight beverage brands from beer giant Anheuser-Busch InBev. This includes Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy. Tilray says that the acquisition will make it the fifth-largest craft brewer in the U.S., with a market share of about 5%.
This complements the multiple beer brands Tilray already has in its portfolio, including SweetWater Brewing, Breckenridge Distillery, and Montauk Brewing.
NASDAQ: TLRY
Key Data Points
The acquisition can help on multiple fronts
Ironically, the big problem with Tilray and many other cannabis companies is that their core business, cannabis, isn't all that profitable. And with plenty of competition in the Canadian pot market, it's difficult to generate much growth.
One of the reasons I like this move for Tilray is by expanding in alcohol, it lessens its exposure to pot. While Tilray isn't going to rival the big beer makers anytime soon, diversifying away from marijuana is a positive step.
For the fiscal year ended May 31, Tilray generated $627.1 million in revenue. Here's a breakdown of the revenue by segment along with the respective gross margins:
| Segment | Revenue | Revenue % | Gross Margin |
|---|---|---|---|
| Cannabis | $220,430 | 35% | 26% |
| Beverage | $95,093 | 15% | 49% |
| Distribution | $258,770 | 41% | 11% |
| Wellness | $52,831 | 8% | 29% |
Data source: Company filings. Figures in thousands.
While the company generates the bulk of its revenue from its cannabis and distribution segments, those are also the ones that have the lowest gross margins. Diving deeper into beverage and alcohol, where Tilray generates better margins, can improve the company's bottom line. Last fiscal year, Tilray posted a net loss of $1.44 billion largely as a result of write-downs of $934 million for asset impairments. It's operating losses are, however, narrowing.
When including its latest acquisitions, Tilray estimates its pro forma beverage revenue will roughly triple to about $300 million annually, which would drastically change its revenue mix.
Is Tilray stock a buy on this news?
Tilray Brands is a more diverse business as a result of these new brands in its beverage segment. But investors should continue to tread carefully with this pot stock as Tilray is a company that still isn't profitable and it has generated negative operating cash flow in three of the past five quarters.
Investors should also remember it also recently acquired Hexo, a struggling cannabis company that could weigh down its financials. And so while the beer business may be encouraging, the cannabis one may still be problematic. Tilray has made a positive step forward but this is far from a safe business to invest in right now.
This is a stock that I wouldn't buy because there's too much noise and too much going on with the business to know what its financials will look like once all the dust settles from these acquisitions. Tilray could still be on the hunt for more deals, which could mean a lot more volatility in its future. Until there's some consistency and stability with this business, investors are better off remaining on the sidelines.
