Tilray Brands (TLRY 1.71%) stock is performing better than most of the major players in the cannabis sector this year, but that's not saying much, as it's still in the red. Further, the pot grower hasn't delivered great returns historically. Its performance over the past three years has been abysmal -- as has that of most of its peers.
Tilray's business is undergoing important changes that could help move things in the right direction. But will those be enough to turn things around? Let's see how things could unravel in the next year for Tilray and decide whether its shares are worth buying.
The leader in the Canadian cannabis market
Throughout the next 12 months, we should see Tilray's cannabis (and overall) revenue increase at a good clip. However, much of that growth won't be organic. In June, the company completed the acquisition of Hexo, formerly one of the leaders in the Canadian cannabis space. According to management, this move makes Tilray the No. 1 company in the country in terms of market share, with a 13% slice of the pie.
For its fiscal year 2023 ended May 31, Tilray reported net revenue of $627.1 million, which pretty much remained flat compared to the previous fiscal year. Hexo's revenue for its fiscal year 2022, which ended on July 31, 2022, came in at $191 million. Clearly, the addition of Hexo will be a bump to Tilray's revenue growth, but it likely won't help it turn a profit, as both were unprofitable before the merger.
However, Tilray is working on improving the bottom line by diversifying away from its cannabis operations.
A stronger beverages segment and higher margins
During its fiscal year 2023, 35% of Tilray's revenue came from its cannabis business, while only 15% came from its beverage alcohol segment. Tilray's other units are wellness (hemp-based products) and distribution (pharmaceutical products). The last one, distribution, was the largest in terms of sales, accounting for 41% of Tilray's top line.
These numbers should change in the coming year as Tilray recently announced the acquisition of eight beer and beverage brands from Anheuser-Busch (BUD 0.12%). The move grants Tilray the fifth-largest market share in the U.S. craft beer business. It should also improve the company's margins, as Tilray's beverages unit is vastly superior to its other segments in this regard.
In its latest fiscal year, Tilray's total gross margin came in at 23%, while that of its beverage unit was 49%. Wellness came second to beverage in terms of gross margin with 29% -- that's not even close. Tilray plans to close the acquisition of these brands by the end of 2023.
Is Tilray stock a buy?
Tilray's decision to move away, at least somewhat, from its cannabis business is a good one. The Canadian marijuana industry has been a nightmare since the country legalized adult use of the substance in 2018. The market is highly competitive and saturated and is much smaller than pot growers would have liked due to the complex legal maze the government created.
Will things improve in the next year? There is little reason to think so, and even if Tilray now holds the top spot in this market, it isn't clear that its cannabis business in Canada can deliver consistently solid financial results. Tilray's distribution also looked stagnant, with sales that slightly declined compared to the previous fiscal year.
The company's beverage business and wellness unit performed better in terms of sales growth. While this business will become more prominent for Tilray in the coming quarters, Tilray's pivot has yet to demonstrate consistency, so in my view, it is far too early to invest in the stock. However, it is worth keeping a close eye on how things evolve.
Tilray is positioning itself in a potentially lucrative beer business while also keeping a solid foot in the cannabis market. Tilray could also benefit from positive regulatory changes in the U.S. If the company's switch to beverages works, the Canadian cannabis market finally lives up to its potential, and the regulatory landscape improves in the U.S., Tilray could end up delivering excellent results over the long run.
