Just when things seemed like they might be looking up, Tilray Brands (TLRY 0.86%) shareholders got a nasty but not entirely unexpected jolt: One of its portfolio companies devoted to selling medicinal marijuana in the U.S. is now no more, after experiencing a lengthy period of decline.
But not all is lost, and despite its struggles, Tilray stock could still be a decent long-term play under the right conditions. So let's take a closer look at what happened, and why there's also a new hope for the future.
NASDAQ: TLRY
Key Data Points
The bad news
Tilray's home market is in Canada, where it sells both cannabis and alcohol, but it also competes in the craft beer industry in the U.S. as well as in the medicinal cannabis industries of a handful of E.U. countries.
One of the most obvious goals of many Canadian marijuana businesses is to get exposure to the U.S. cannabis market. But as cannabis is not yet legal at a federal level in the U.S., aspiring competitors can choose to either try to enter permissive state markets in advance of federal legalization, or to hold out for the laws to change and then enter as many states as they prefer. Tilray picked the second option, though it did lay some groundwork to give it faster access to the market upon legalization than what would be possible from a cold start.
In short, in 2021 it invested in buying a majority of the convertible debt of MedMen, a medicinal marijuana chain with operations in a few states, for $165.8 million. The idea was to exercise the right to convert that debt into its shares,conferring a controlling ownership immediately after legalization, thereby facilitating an expedient entry into the U.S. market. MedMen's stores, complete with crowds of already loyal customers, would become convenient distribution points for Tilray's myriad marijuana brands.
Alas, there's been a bit of a snag.
MedMen declared bankruptcy in late April. Its original CEO and board of directors have resigned, with the CEO departing in January and the board leaving around the time of the bankruptcy filing. There are roughly $410 million in outstanding claims by creditors against its meager remaining assets.
There is simply no way that Tilray will be able to move forward with its plans to compete in the U.S. cannabis market as they were originally envisioned.
The good news
As unfortunate as MedMen's crashing and burning is, the upside is that Tilray's management is already taking aggressive steps to set up a new plan for entering the U.S.
On May 22, the company announced it would be launching an at-the-market stock sale program to raise as much as $250 million in cash. That cash is to be earmarked specifically for acquisitions of marijuana businesses or assets in the U.S., and is explicitly not to be used for covering operational expenses.
As of its fiscal Q3, Tilray had $226 million in cash, equivalents, and marketable securities, so if it issues and sells as much stock as it's authorized for, it could have a decent war chest for expansion.
Furthermore, this time around, the regulatory catalyst for market entry won't be full legalization. The effective date of marijuana's U.S. rescheduling from Schedule I to Schedule III, which is currently in progress, is the new target for game time. It's unclear exactly when the process will be complete, but it will likely be within the next 12 months.
Shareholders will rightfully grouse that the value of their shares will get diluted once more shares are sold. Still, the quick pivot to a new plan is unambiguously good news, and the company likely has enough money to make things work. The far more tangible time target will also help in avoiding the plan languishing until it withers on the vine, as it did with MedMen, as the march toward full legalization has taken far longer than what many industry experts estimated.
This stock is a risky play
Tilray now has a realistic approach to accessing the U.S. market. That means it will likely experience plenty of revenue growth whenever it actually enters the market. In other words, its status as the world's largest cannabis business by revenue is probably safe for now.
At the same time, reaching profitability on an operational basis is still very far off, and the latest plan almost certainly kicks the can down the road even further. Its trailing-12-month (TTM) operating losses were $121.3 million. At some point, this company is going to need to prove to the market that it can produce more money for investors than it burns.
Until then, this isn't the right pick unless your risk tolerance is very high and you're desperate for exposure to the marijuana industry.
