The cannabis industry has been making headlines lately. Several positive developments in the U.S. could turbocharge the sector. These include a bill in Congress that could grant pot companies easier access to traditional banking services, and the U.S. Drug Enforcement Administration considering easing regulatory restrictions around marijuana's use.
While pot stocks have been a significant disappointment in the past few years, these events are helping rekindle interest in the sector. And one of the best stocks to consider investing in is Tilray (TLRY 1.71%). Can this company deliver excellent returns from here on out? Let's find out.
Data source: YCharts
Tilray's diversified revenue stream
Tilray does much of its business north of the U.S. border. It is one of the largest cannabis companies in Canada. In June, it completed the acquisition of Hexo -- a former rising star in the Canadian pot market -- granting Tilray a leading 13.4% market share in the country. However, Tilray has sought to diversify its revenue sources. The company is now also involved in drinks through its beer and beverages segment. Its wellness unit offers hemp-based products, and its distribution business sells various pharmaceutical products.
Tilray's decision to expand beyond cannabis was a great one. The Canadian market has been a disaster due to oversupply (including from illegal channels) and overregulation. That's why most pot stocks in Canada have been, at best, bad investments in the past few years. However, Tilray is still growing, although a lot of that has to do with acquisitions. Still, the company is performing better than most of its peers, suggesting it could be a winner over the long run.
In the company's latest period, the first quarter of its fiscal year 2024, ended Aug. 31, Tilray's net revenue of about $177 million increased by 15% year over year. All four of the company's main segments showed decent sales progress. Tilray's gross profit declined by 9% year over year to $44.2 million, but its net loss per share narrowed to $0.10 from $0.13 in the year-ago period. So, Tilray remains in the red, but overall, its latest earnings report was not bad.
What does the future hold?
The marijuana sector will likely continue to be a bit challenging, whether in the U.S., where adult use of cannabis remains illegal at the federal level, or in Canada, where it has been legal for about five years. That's one reason Tilray is doubling down on other segments, especially its beer and beverages business. In October, the company closed the acquisition of eight beer and beverage brands from brewing company Anheuser-Busch InBev.
The transaction gave Tilray a 5% share of the U.S. craft beer market, good enough for a fifth-leading position in this niche. There are at least two other reasons Tilray's beverages business will be critical to its long-term success. First, it carries much juicier margins. In its Q1 2024, Tilray's gross margin was 25%, down from the 32% reported in the year-ago period.
The company's beverages segment, however, reported a gross margin of 53% -- or more than twice that of its overall business -- representing an increase from the 47% recorded in the prior-year quarter. If Tilray can maintain these margins within this segment while making it an increasingly prominent part of its operations, it will translate to much stronger profits.
Second, the pot company is planning to mix its leadership in beverages and cannabis by making marijuana-infused drinks and using its existing substantial distribution channels and footprints to have a leg up on competitors. Tilray's chief executive officer, Irwin Simon, said the company is hoping that if/when marijuana becomes legal in the U.S., Tilray can get the ball rolling faster than its peers in dominating the market for infused drinks.
Of course, no one knows when (or if) U.S. legalization will come. So while Tilray's plan sounds exciting, as of now, it's still speculation.
Is Tilray worth the trouble?
Tilray's stock is down by 87% in the past five years, and for good reason. The company's financial results haven't been great, its prospects have been dicey, and the sector is shaky. While Tilray has managed to improve its standing in the industry and has a plan for the future, there remains substantial uncertainty, and that's why investors should hold off for now. Tilray could become a much better option, but currently, it's best to watch from the sidelines.
