There's been excitement in recent months over news that the U.S. government may be looking at rescheduling cannabis, so that it is no longer a Schedule I substance. Many pot stocks, even Canadian ones, have jumped on the news. But the CEO of Tilray Brands (TLRY 1.71%), one of the largest cannabis companies in the world, knows that rescheduling cannabis wouldn't necessarily benefit his company directly.
Rescheduling will help the industry, but investors shouldn't expect it to help Canadian pot stocks
Rescheduling marijuana, while it would be a positive step for the marijuana industry, may not mean a whole lot for Canadian cannabis stocks. That's because while it would help improve access for people in the U.S., it wouldn't necessarily pave the way for Canadian cannabis companies to do business south of the border. Legalization is a whole other beast, and simply rescheduling cannabis wouldn't be enough to open the doors to Canadian pot companies.
In a recent interview with BNN Bloomberg, Tilray Brands CEO Irwin Simon admitted as much, stating that it "clears up a lot of confusion and it's great for the industry." But he also pointed out that it wouldn't do anything for Tilray today: "Today, direct benefit, absolutely not."
While Simon was talking specifically about Tilray, the reality is that other Canadian cannabis companies are in the same boat. Until U.S. marijuana legalization actually takes place and Canadian companies can enter the market, any change with respect to rescheduling marijuana will only benefit businesses that are already operating in the U.S. It won't open up any doors on its own.
Investors may read into the rescheduling of pot as a possible first step toward nationwide marijuana legalization, but that's a big assumption to make. When it comes to passing legislation, especially related to cannabis, investors shouldn't assume anything is a guarantee. At best, it could still take years for significant reform to take place.
U.S. marijuana legalization would open more opportunities for Tilray Brands
Simon has often been bullish on the prospects of marijuana legalization in the U.S. and what it could mean for his company. One of its first moves may be to acquire multi-state operator (MSO) MedMen, which Tilray acquired the senior notes of in 2021.
Tilray has also been acquiring multiple alcohol brands in the U.S., which gives it a footprint in the country without having to rely on cannabis. Those positions could collectively help it penetrate the U.S. pot market should it one day open up.
A big challenge for Tilray and other Canadian pot producers is that the domestic market simply isn't all that significant. That's evident through Tilray's sales growth, which hasn't always been positive.
TLRY Revenue (Quarterly YoY Growth) data by YCharts.
Tilray remains a risky investment
The danger for investors is in assuming that legalization is coming soon and investing based on that assumption. That can lead to frustrations, because without a U.S. market to tap into, Tilray's growth rate may decline as competition continues to increase in Canada.
In the company's most recent quarterly earnings report, Tilray incurred an operating loss of $34.4 million, which was higher than the $21.2 million loss it posted in the same period last year. It's also still burning cash, using up $15.8 million in its day-to-day operating activities over the three-month period ending Aug. 31. While that's an improvement from a year ago when Tilray burned through $46.3 million, it underscores the risk that persists and reminds investors that this still isn't a sustainable operation.
What are cannabis investors to do?
As it stands today, there isn't a Canadian pot stock I would invest in. There's simply too much competition, the market isn't getting big enough, and these businesses just aren't in strong enough financial shape to be good investments.
Tilray is arguably in better shape than its peers, as it is diversifying into alcohol, but it still has a long way to go in proving that it can make for a good investment. Down 40% this year, the pot stock can still go lower.
Rescheduling marijuana could be a positive development for the U.S. cannabis industry, but it alone won't make Tilray or other Canadian pot stocks better buys. If you're bullish on the U.S. cannabis industry, you're better off simply investing in U.S.-based pot stocks.
