If it plays its cards right, Tilray Brands (TLRY 1.71%) could be a stellar long-term investment. Between its massive marijuana empire spanning five continents and a burgeoning craft beer operation in North America, the company is positioned to be a global leader in both emerging and established industries.
But as wise investors know, big plans do not necessarily make for big gains for shareholders, and the ongoing realignment of the cannabis industry makes buying shares right now into a bit of a risky endeavor. So is this stock a smart pick for long-term holding, or would it be better to wait for conditions to improve?
The long-term case for holding Tilray
In the long term, the global market for cannabis products will likely look quite similar to the beer or beverage alcohol industry. These businesses cultivate or buy raw materials where it's cheapest to do so, manufacture them according to consumer preferences, distribute the products to retailers, and market them to a crowd of both new and returning loyal customers.
Brands that cater the most effectively to people's tastes will slowly develop a competitive advantage in the form of customer retention, thereby enabling their market share to remain robust in the face of new entrants to the market, while also defending their profit margin from erosion.
Under the right conditions, it might even be possible for a company that sells beer to use a lot of the same distribution infrastructure to sell marijuana products too, juicing more revenue out of the same assets and experiencing higher margins than what would be probable with selling alcohol alone.
And that's exactly what Tilray is hoping to do with both cannabis and beer, though its efforts are still maturing and awkwardly split across a few geographies. Presently, it holds around 13% of the Canadian market for recreational-use marijuana products, but it doesn't yet compete in the U.S. cannabis market whatsoever.
Since its move in early October to acquire a handful of craft beer brands, it holds a 5% share of the U.S. craft beer market too, but it has no alcohol operations or distribution in Canada. In the E.U., it's the market leader in medicinal marijuana, but in countries like France, its footprint is tightly limited as a result of regulations.
In the future, there is a solid chance that Tilray's North American businesses will be able to fully unify across borders, as cannabis will probably eventually be legalized, and its alcohol brands will eventually need to seek new customers to continue to grow. If that happens, it could become one of the biggest booze companies in the world, and almost certainly the world's largest marijuana company.
Under such conditions, it might be able to find economies of scale in cultivation, manufacturing, and distribution, all of which would drive its margins upward. Building valuable brands with high levels of customer loyalty could seal the deal for it to be a stellar investment, at least for people buying its shares today. It might even be making enough free cash flow (FCF) to justify paying a dividend. And over the very long term, it could maybe even do the same in Europe or other global economic centers.
There are safer options for long-term holding
As sunny as this scenario sounds, the Tilray of today is a very long way from realizing its ambitions and becoming a stable alcohol and cannabis giant that returns lots of capital to investors.
Tilray isn't profitable, and its quarterly operating margin hasn't improved in the last three years. In its first fiscal quarter of 2024, it burned $20 million in cash. Efficiency in its cannabis segment remains subpar, with its quarterly gross margin on cannabis sitting at an unimpressive 35% in its fiscal Q1, down from 51% a year ago. And while its newly purchased craft beer brands like Shock Top have at least some accumulated brand value, it's a long way from being able to rest on its laurels when it comes to a base of recurring revenue derived from loyal customers.
In recent times, Tilray has also proven to be a very risky stock. In the last 12 months alone, its shares lost 51% of their value. That's a period where a major acquisition of beer brands was announced, nothing particularly good or bad happened operationally, and there weren't any major disruptions in its various markets.
All this is to say that the market does not like this stock today, and it might be some time before that changes, if it ever does. Most importantly, the company hasn't been making the operational efficiency improvements it needs to reach the sunny future state of flourishing.
So should you invest in Tilray today? Probably not, but it's worth keeping an eye on for a couple of years. If it can demonstrate that its grand ambition is more than a dream by growing while profitable, it'll go a long way toward being an evergreen pick.
