During the past five years, investing in cannabis stocks has led to dreadful returns for investors. One of the top cannabis stocks in the industry is Tilray Brands (TLRY +1.23%), and during that stretch, its valuation has crumbled, falling by a staggering 94%.
The Canada-based company has been eager to enter the U.S. marijuana market. But without national legalization, there hasn't been a path forward. Instead, the company has been looking at other ways to diversify, such as acquiring a number of alcohol brands. By doing so, it has been able to expand its presence in the U.S. and increase sales. And in the future, should marijuana legalization take place, it can be in a good position to leverage its existing operations to take advantage of those opportunities.
But while expanding into alcohol has undoubtedly made Tilray a more diverse business, the big question is whether it's in a better position today. Is the stock more attractive than it was five years ago, and can it make for a good contrarian investment right now?
NASDAQ: TLRY
Key Data Points
Tilray's fundamentals still aren't great
A big problem for Tilray and many other cannabis producers is that they aren't profitable and burn through a ton of cash. And that inevitably leads to frequent share offerings and equity dilution, which can cripple an already struggling stock.
Earlier this month, Tilray released its latest quarterly numbers and while they did show growth, they also showed that its financials are still plagued with multiple problems. For the fiscal period ended Nov. 30, the company reported an operating loss of $42.2 million, which was actually worse than the $41.8 million loss it posted a year ago. This is even as its top line rose by 9%. Meanwhile, its operating cash flow for the past six months was a negative $76 million. That's an acceleration from the $46.3 million cash burn it reported during the same period a year earlier.
What also stood out to me from the earnings report was that the company removed some slow-growing stock-keeping units (SKUs) in its beverage segment. Tilray has been feverishly loading up on brands that other beer makers didn't want or need anymore. And now with more than 20 brands, it has become a bit bloated. This is similar to the problem cannabis investors have seen in the past when cannabis companies often become too aggressive with respect to expansion or offering too many types of products. While Tilray has been eager to become a top craft beer company in the U.S., it has come at the cost of acquiring some not-so-strong brands along the way. And this signals to me that perhaps the business is still focusing on growth for the sake of growth, rather than making careful assessments of whether an acquisition will help its operations and lead to a stronger bottom line.
The future may not be a whole lot brighter for Tilray
Five years ago, there was growing optimism around marijuana legalization and that excitement would rise with the Democratic Party's election win in 2020. Unfortunately, despite controlling the House and Senate, the Democrats didn't pass any significant legislation that helped the cannabis industry.
This month, a new Republican government has taken over, and there is much less optimism around legalization because Republicans typically take a harder stance on drugs. Investor sentiment is down, to say the least. In just the past three months, the AdvisorShares Pure US Cannabis ETF has declined by 50%.
Tilray's alcohol business may be giving the company a bit of revenue growth but this still isn't a business that looks to be on a path to profitability or on the cusp of becoming a much safer investment. And without much hope for the U.S. marijuana market opening up anytime soon, it can be difficult to find reasons to remain optimistic that the future will be any better for Tilray.
Tilray is still a highly risky stock to own
Some investors may be tempted to buy Tilray's stock with its valuation so much lower than five years ago. But just because the value has plunged doesn't mean that Tilray's shares can't continue to go lower. It's not even a sure thing that the company may be able to survive for the next five years, especially if it continues to burn cash and incur heavy losses.
Tilray may be more diverse than it was five years ago, but I don't think it has shown that it is a better investment today. This is a stock that's likely going to appeal primarily to speculative investors who have a high risk tolerance. For the vast majority of investors, however, there are much better growth stocks out there to consider than Tilray.
