Cannabis producer Tilray Brands (TLRY 3.70%) has been busy with acquisitions in the past year. In particular, it has been loading up on beer companies and brands. It now has a 5% market share in the U.S. craft beer industry. While it may seem like the business is looking to diversify its operations, there's more to it than that. For CEO Irwin Simon, it's also about setting up the company for growth down the road and using these acquisitions to help the cannabis business as well.
Preparing for the opportunity for cannabis-infused beverages
By acquiring beverage companies, Tilray can expand its capabilities for making cannabis-infused beverages. In an interview with BNN Bloomberg, Simon said, "one day, we will infuse these drinks with THC, with CBD, but we'll have the distribution and we'll have the brands when and if legalization does happen." Tetrahydrocannabinol (THC) refers to the psychoactive substance in cannabis that gives consumers a high, while cannabidiol (CBD) is associated with medical marijuana and the health benefits of cannabis.
The market for cannabis-infused beverages is an intriguing one because while it is growing at a fast rate, it's also incredibly small right now. According to estimates from Fortune Business Insights, the global market for cannabis-infused beverages was worth just $915 million in 2021. Analysts expect, however, that it will expand at a compound annual growth rate of more than 54% and be worth more than $19 billion by 2028.
The appeal of cannabis-infused beverages is that they can give consumers a buzz without high calories, and they don't result in a hangover the next day. The big test will be how these beverages taste and whether they can be real alternatives to beer. Right now, that looks to be unproven, as the market remains fairly small.
NASDAQ: TLRY
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Distribution is also key
One of the more important parts of Tilray's recent acquisitions comes back to distribution, which Simon also mentioned. Since the company can't go out and acquire cannabis producers in the U.S., the next best thing is to acquire beverage companies that can potentially create cannabis-infused beverages down the road. Plus, by acquiring these businesses, Tilray is also securing space for production.
By having the assets in place that it can potentially turn into growing space, Tilray could have an advantage for when the industry is legal, as opposed to waiting for legalization and then looking to acquire assets, presumably when there will be much more competition for them. Simon says the company is "well diversified, well positioned" for when federal legalization takes place in the U.S.
Is Tilray's strategy a good one?
Tilray looks to be betting on both marijuana legalization and cannabis-infused beverages. Although I agree it's in a good position should legalization take place, there's still no time frame of when or even if that will happen. The risk is that the company invests money into these operations, burns through cash waiting for legalization to happen, and then potentially destroys its financial position over time.
Over the past four quarters, Tilray has generated positive operating cash flow of just under $8 million. But it has also spent more than $285 million on investing-related activities. Tilray had less than $449 million in cash and short-term investments as of the end of May. While it's not running out of money anytime soon, it also needs to be careful to conserve it so that it doesn't run into problems later on because legalization, even if it happens, could still be years away. And that may require more cash infusions at that point, not fewer.
Should you invest in Tilray Brands?
Tilray isn't a company that investors should be too comfortable investing in. While it does have a long-term strategy, I'm not sure if investing in beverage companies is the way to go. This has happened in the marijuana industry before: Load up on assets and acquire businesses, then, after the financials can't keep up and there's a need to conserve cash, ditch them. This situation has the potential to play out similarly, especially if craft beer doesn't end up being as lucrative as Tilray expects it to be.
Although the stock appears cheap, trading at less than its book value, investors should be wary of Tilray because it's still a volatile investment. If you want exposure to the U.S. cannabis market, you're better off simply investing in multi-state marijuana operators that are already there and generating revenue. Tilray's strategy is getting increasingly complex, and it may result in the company's operations becoming bloated and problematic later on. At the very least, it's by no means a surefire strategy for success.
