Tilray Brands (TLRY +0.92%) went public in the U.S. in 2018 when cannabis was among Wall Street's hottest topics. However, despite the cannabis market surpassing $38 billion last year in the U.S. alone, Tilray has been a colossal disappointment. The stock has lost virtually all of its value. It's safe to say the odds don't favor early investors making their money back.
However, at a market cap well under $1 billion, Tilray is down so much that new investors may be curious about the stock's upside if the company does figure things out. Could Tilray Brands, now a penny stock, make you a millionaire?
Here is what you need to know.
Tilray's evolution into a global cannabis business
There is usually an autopsy process whenever a stock fails as severely as Tilray did. People may have different views on why the business hasn't done well, but I think it boils down to the company trying to do too much too soon.
NASDAQ: TLRY
Key Data Points
Tilray went public as one of the first licensed producers in Canada shortly after the country legalized cannabis. It started in medical cannabis, but management aggressively expanded, which is understandable considering how new the legalized cannabis industry was. A company can have a first-mover advantage if it establishes itself in a new market before its competitors. In just a few years, Tilray engaged in multiple acquisitions and joint ventures to get into recreational cannabis, hemp foods, and beverages infused with THC (the psychoactive ingredient in cannabis). Then, in late 2020, it merged with Aphria, a major competitor.
Today, Tilray is a global company selling products to countries on five continents. It sells over 40 brands of medical and adult-use cannabis, craft beer, wine, spirits, and wellness products. The company generated $829 million in sales last year, and analysts estimate revenue will grow to $893 million this year and $943 million next year.
The top line isn't the problem -- the bottom line is
I don't think sales are a problem for a business that could surpass $1 billion in annual revenue over the next few years. Plus, the cannabis market shows promise. Grand View Research estimates the U.S. cannabis market will grow by over 11% annually through 2030, with opportunities in pharmaceuticals, cosmetics, food, and beverage. Tilray's diverse product portfolio should feel those tailwinds.
Instead, Tilray's biggest problem has been its failure to operate profitably. Despite substantial sales, Tilray suffered steep losses last year. Its free cash flow was minus $92 million, and net losses approached a quarter-billion dollars:
TLRY Revenue (TTM) data by YCharts
It's not easy being a global company in an industry where the market is wildly different from place to place. For example, cannabis is still not legal at the federal level in the United States. Cannabis's legal status in America varies by state, as do the excise taxes. Legalized cannabis can also face pricing pressure. Some states allow residents to grow cannabis for personal consumption, and the traditional black market hasn't gone away.
No, Tilray is probably not a millionaire maker. Here is the biggest reason why
That's not to say Tilray can't figure things out, continue to grow, and turn profitable. Yet, even if that happens, the stock is unlikely to make shareholders wealthy. The company expanded too quickly while the business was immature and unprofitable. It had to continually issue tons of stock to raise the money for these acquisitions and to fund its operations. The diluted share count has grown 348% since 2018:
TLRY Average Diluted Shares Outstanding (Quarterly) data by YCharts
Remember, the more shares there are in a company, the thinner its revenue and profits are spread across the shareholder base. Increasing the share count causes share dilution, which helps raise money for the company but comes at the expense of diminished investment returns. Given the sharp losses Tilray continues to suffer, there's a good chance that the share count will continue to rise.
So, even if Tilray's business is thriving years from now, it may not translate much to investment returns. Tilray has become a penny stock for good reason, and these cheap, highly speculative stocks rarely turn out well. Therefore, investors are better off looking elsewhere.
