If you've sought exposure to the cannabis industry recently, you've no doubt had to consider whether an investment in Tilray Brands (TLRY 3.78%) could be a suitable choice. And with a new bull market driving up shares of many companies, now might seem like an especially attractive time to initiate a position.
On the other hand, people who have owned these stocks over the past five years are down 83%, and popular sentiment around cannabis stocks remains lukewarm to bad. So what is the right move?
Why could now 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 generally positive sentiment environment, his achievements are more likely to result in upward moves in the stock, and his difficulties will detract less than they would otherwise. Second, if there are important catalysts, such as marijuana legalization In the United States or the European Union, the boost you receive could be much greater than if the same events occurred in a bear market full of doom and gloom.
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, unfortunately, will eventually end.
In the long term, things are going well for Tilray, although there is still a lot to do. With its revenue increasing 34% in the second quarter of its fiscal 2024 year (the three months ending November 30, 2023) to reach $194 million, led by a 117% increase in its alcohol sales ( surpassing $47 million), It's now clear that management's decision to diversify into selling beer and spirits was a smart one. In fact, within its fiscal year 2024, the company expects to generate free cash flow (FCF) on an adjusted basis.
That would be an important catalyst. However, it is still unclear whether Tilray's operations are enough to turn the business into an ongoing cash generator. Your last 12 months Operating income remains in the red, with a loss of $35 million in the most recent quarter.
There are still important issues to address
Despite Tilray's favorable positioning in the North American alcohol industry and the nascent EU cannabis scene, it has one problem that appears to be heading in the wrong direction: its ability to tap into the US cannabis market in the event for cannabis to be legalized. And that could mean you miss out on one of the biggest catalysts that could happen.
In short, the company intended to enter the US marijuana market by forging a strategic agreement with a local multi-state company called with but in 2021. The idea was to buy MedMen's debt today and then, after the federal legalization of marijuana, convert the debt into shares that confer voting rights. After that, the distribution infrastructure that Tilray built to serve its alcohol brands could be used to begin penetrating the market beyond the initial foothold.
But MedMen was not a healthy company when Tilray bought it, and today it is on life support, selling off its core operations to keep the lights on. Several members of its leadership team have come to the door this year, including the CEO. And even if it had no problems, Tilray would only have a minority stake in the event of legalization, so the overall financial impact could at best 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 is certainly among the largest multinational cannabis companies, there are many risk factors that are out of its control, including when and if legalization occurs. Cannabis prices can rise and fall, competitors can develop preferred products that maintain market share, and investors can disfavor the entire marijuana industry as a group of stocks for years.
But I am confident that this company will be able to resolve its operational inefficiencies in the long term. And thanks to his significant progress in generating income from alcohol, he has some financial flexibility to get by in the meantime. That doesn't mean its stock will be a winner, but it could one day perform better than it did recently. So if you're willing to hold on to it long enough to see that it has a chance to flourish, and if you're willing to take significant reductions between now and then, your temperament is right to make a purchase. But if you need a return in the next five years, don't even think about buying shares. The risks are substantial, even if the future looks bright, and even if a roaring bull market is taking shape.
