Cannabis stocks continue to disappoint. Tilray (TLRY 1.71%), one of the leaders in the Canadian market, is no exception. The stock is down by 17% year to date -- the shares are trading for just $1.92 as of this writing. Tilray might almost look attractive at that price if the pot grower can bounce back. Ending the year with a share price of $3, representing a nearly 60% increase from its current levels, would be a good start.
Can Tilray pull that off by year end? Let's find out.
Financial results could play a role
Reporting solid and improved financial results is an excellent way to regain investor trust, especially when subpar quarterly updates have been key in sinking the company's shares. That describes Tilray's situation well, although it isn't all the company's fault. Tilray is the No. 1 cannabis company in Canada in terms of market share, but the market north of the border has been challenging.
Canadian cannabis companies have had to deal with oversupply, regulatory challenges, competition from the illegal market, and other headwinds. So it's unclear if the pot grower can make meaningful progress by year end, or at least the kind of progress that would send its stock price soaring. And while Tilray has significant international operations, legal challenges abroad somewhat limit the opportunities.
In the second quarter of its fiscal year 2024 (ended Nov. 30), Tilray's revenue of $194 million increased by 34% year over year, primarily due to acquisitions. The company is still unprofitable, although it has improved on that front. Its net loss of $46.2 million was better than the $61.6 million it recorded in the prior-year quarter. However, Tilray's adjusted gross margin decreased to 27%, down from 31%.
Will the company do significantly better this year? In my view, there is little reason to think so, given Tilray's track record and the sad state of the pot market, especially in Canada.
How will the market develop?
So-called penny stocks can soar on positive developments. In Tilray's case, the company's shares would benefit from an improved outlook in the cannabis industry. This could take many forms, including good news on the regulatory front. While those are always hard to predict, there is a potential catalyst along those lines brewing in the U.S. Last year, the U.S. Department of Health and Human Services (HHS) recommended that cannabis be downgraded to a schedule III substance -- it is currently classified as schedule I, the most restrictive category.
The decision is at the Drug Enforcement Administration's (DEA) discretion; it could come down sometime this year. If the DEA follows the advice of the HHS, cannabis would suddenly be recognized at the federal level as having certain accepted medical uses in the U.S. The decision would also make it easier for cannabis companies to raise funds -- something that has proved difficult due to the stringent federal laws in the U.S.
Although Tilray is headquartered in Canada, it has made some moves to position itself to benefit from -- ideally -- complete legalization of adult uses of cannabis at the federal level in the U.S. The company acquired eight beer and beverage brands from Anheuser-Busch InBev late last year, making it the fifth-largest craft brewer in the country. Tilray hopes that if federal legalization lands, it will have a leg up on competitors in producing and delivering cannabis-infused drinks.
Reclassification that ends marijuana's status as a schedule I substance won't make this plan possible yet. However, the market might reward the entire industry, along with Tilray, on the grounds that reclassification would be a significant step in the right direction.
Not worth the trouble
It is worth noting that Germany recently legalized some limited uses of cannabis for adults, a decision which, according to Tilray, opens up an opportunity worth about $3 billion a year. The news did little to help Tilray stock. True, Germany -- where Tilray is a cannabis leader -- is a smaller market than the U.S. Investors would have a different reaction to positive regulatory news in the U.S. In fact, Tilray's shares recently jumped after an endorsement of cannabis legalization from U.S. Vice President Kamala Harris.
News of reclassification or some other positive regulatory development might indeed be the catalyst for Tilray's shares to soar. I wouldn't put it past the company to hit $3 or more by year end. More importantly, though, Tilray's long-term prospects remain highly uncertain. Between legal and regulatory difficulties and Tilray's poor financial results, there isn't much to cheer about here. And even if the U.S. legalizes or reclassifies cannabis, the Canadian market experience has taught us that this is no guarantee of success. Investors should stay far away from this stock.
