One by one, the leaders of the Canadian pot market are falling completely out of favor with investors. Tilray (TLRY 1.71%), one of the most prominent of the bunch, hasn't been very different. Over the past three years, the company's shares have plunged by 80% and are exchanging hands for just $1.71 apiece, making it a penny stock (those with a price under $5). Can Tilray stage a comeback?
If it does, those who get in on the stock now could see massive returns down the road. On the other hand, Tilray's stock could continue to fall and end up practically worthless. Let's try to decide which of these scenarios is more likely.
The challenging Canadian cannabis market
Recreational uses of cannabis remain illegal at the federal level in the U.S. Tilray, like other top players in this industry in North America, hopes that will change soon. However, the Canadian experience has taught us that legalizing marijuana wouldn't automatically transform Tilray or any of its peers into a great business. It has been roughly five years since Canada legalized adult use of pot, but the market has encountered serious issues.
First, companies needed to obtain appropriate licensing to grow and sell weed legally. This system was complex and convoluted, slowing the market's growth. Second, the market seemed so promising that many, perhaps too many, companies dipped their toes into this space. Third, illegal channels competed with legal ones and took away a fair share of the market.
These challenges made it hard for Tilray to generate consistent financial results and partly explain the abysmal performance it has experienced in the past three years.
Could Tilray's exciting new strategy work?
Tilray is well aware of the challenges in the Canadian cannabis market. That's why the company has substantially diversified its revenue stream. In the first quarter of its fiscal year 2024, which ended on Aug. 31, Tilray's cannabis business accounted for just 39% of its total revenue of $176.9 million. It was tied with distribution -- the sale of pharmaceutical products -- for the largest segment by revenue.
Tilray's other business units, its beverage and alcohol business and its wellness segment (which sells hemp-based products) accounted for 14% and 8% of total revenue, respectively. Tilray's top line in the quarter increased by 15% year over year, although it wasn't all organic growth. It also had acquisitions to thank for that performance. And the company is doubling down.
In October, it announced it would buy out eight beer and beverage brands from Anheuser-Busch InBev, a leader in this field. The transaction makes Tilray one of the most prominent players in the U.S. craft beer market. But to what end? Tilray also recently announced that several of its beverage brands in Canada would be launching several cannabis-infused drinks in the country.
The company is eventually looking to do the same in the U.S. However, that will prove difficult as long as the substance remains illegal at the federal level. But if things change, CEO Irwin Simon has made it clear that Tilray's existing footprints in the beverages market in the U.S. will allow it to get a leg up on its competitors and dominate the cannabis-infused drinks space.
Further, the company's alcohol and beverages segment typically carries much juicier margins than the rest of its business. Still, Tilray's strategy here partly relies on something impossible to predict. No one knows when the U.S. government will legalize cannabis. It could take one or 10 years and anything in between or beyond. In the meantime, Tilray's revenue will struggle to grow organically at a good pace while it will almost certainly remain unprofitable for a while.
It did improve on that front in its first quarter of 2024, turning in a net loss per share of $0.10 compared to $0.13 in the parallel period of the previous fiscal year. Still, given the company's track record, it is hard to bet on it permanently becoming profitable anytime soon.
It's too early to press the "buy" button
Tilray's stock isn't anywhere close to a slam dunk, even at its current levels. While its attempts to diversify away from the Canadian cannabis business are commendable -- and its chasing a high-margin business in alcohol and beverages could be interesting --there remain too many unknowns to make it a solid buy. Tilray may be one of the best stocks in the cannabis industry, but that alone doesn't make it a good stock. Investors should watch from the sidelines for now.
