If you've sought exposure to the cannabis industry recently, you've doubtlessly had to consider whether an investment in Tilray Brands (TLRY 1.71%) could be an appropriate choice. And with a new bull market carrying shares of many businesses aloft, now might seem like an especially appealing time to start a position.
On the other hand, people who have held this stock over the last five years are down by 83%, and the popular sentiment surrounding cannabis stocks remains somewhere between lukewarm and bad. So what's the right move?
Why now might be a favorable time to invest
The context of a bull market, i.e., rising stock prices, means a couple of things for Tilray. First, in a widespread environment of positive sentiment, its accomplishments are more likely to result in upward movements in the stock, with its pitfalls detracting less than they might otherwise. Second, if there are any major catalysts, like marijuana legalization in the U.S. or the European Union, the boost it gets might be much larger than if the same events occurred in a bear market full of pessimism.
Beyond those elements, investors should be cautioned to keep their focus on the company's long-term potential rather than its performance in the bull market, which, regrettably, will eventually end.
For the long term, things are shaping up well for Tilray, though there's still plenty of progress to be made. With its revenue rising by 34% in the second quarter of its fiscal 2024 -- the three months ended Nov. 30, 2023 -- to reach $194 million, led by a 117% increase in its alcohol sales (surpassing $47 million), it is now clear that management's decision to diversify into selling beer and liquor was a smart one. In fact, within its 2024 fiscal year, the company expects to generate free cash flow (FCF) on an adjusted basis.
That'd be a significant catalyst. Nonetheless, it's still unclear if Tilray's operations are sufficient to turn the business into a cash generator on an ongoing basis. Its trailing-12-month operating income continues to remain in the red, with a loss of $35 million in the most recent quarter.
There are still major issues to tackle
Despite Tilray's favorable positioning in the North American alcohol industry and in the E.U.'s nascent cannabis scene, it has one issue that seems to be trending in the wrong direction: its ability to access the U.S. cannabis market in the event of cannabis legalization. And that might mean it misses out on one of the biggest catalysts that could occur.
In short, the company aimed to enter the U.S. marijuana market by forging a strategic deal with a local multistate business called MedMen in 2021. The idea was to purchase MedMen's debt today, then, upon federal marijuana legalization, convert the debt into shares conferring voting rights. After that, the distribution infrastructure Tilray built to serve its alcohol brands could be used to start penetrating the market beyond the initial foothold.
But MedMen wasn't a healthy company when Tilray bought it, and today, it is on life support, selling off its core operations to keep the lights on. Multiple members of its leadership team have been heading for the door this year, including the CEO. And even if it wasn't struggling, Tilray would only have a minority stake in the event of legalization, so the overall best-case financial impact might be limited anyway.
Aside from the issues with MedMen, it's important to note that Tilray is not a safe stock by any means. While it's true that it's among the very largest multinational cannabis companies, there are a lot of risk factors that are outside its control, including when or whether legalization happens. Cannabis prices can rise and fall, competitors can develop preferred products that hold market share, and investors can disfavor the entire marijuana industry as a group of stocks for years on end.
But I'm confident this business will be able to figure out its operational inefficiencies in the long term. And thanks to its significant progress in generating revenue from booze, it has some financial flexibility to tide it over in the meantime. That doesn't mean its stock will be a winner, but it could one day perform better than it has recently. So if you're willing to hold onto it for long enough to see it have a shot at flourishing, and if you're willing to accept major drawdowns between now and then, your temperament is a good fit for making a purchase. But if you need a return in the next five years, don't even think about buying the stock. The risks are substantial, even if the future looks bright, and even if there's a roaring bull market taking shape.
