It was almost four years ago Tilray Brands (NASDAQ: TLRY) announced that it would merge with low-cost cannabis producer Aphria to create a larger, more dynamic and global marijuana company. At the time, it was an interesting prospect for investors, creating what could end up becoming the best cannabis stock to own.
But since that announcement in December 2020, shares have fallen more than 85%. There was a lot of buzz around the news and the stock soared soon after, but the enthusiasm would fade… significantly.
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Over the next five years, I expect Tilray to continue evolving its business, but this time, away from cannabis. It may still be a small part of their business, but I predict that Tilray won’t be known as a marijuana company for much longer.
For years, while Tilray has been patiently optimistic that the United States could legalize marijuana, resulting in a huge new growth opportunity for the Canada-based company, it has been expanding its operations in other ways. It has expanded into international cannabis markets and acquired alcohol brands.
Last month, the company reported its earnings for the first quarter of fiscal 2025. For the period ending August 31, its sales grew 13% year over year to $200 million. But of that total, less than a third (31%) of sales actually came from its cannabis operations.
The company generates more money from the distribution of pharmaceutical products abroad (34%) than from what it is known for: cannabis. And even its alcohol business now accounts for 28% of revenue, with wellness being its smallest segment, contributing 7% of total sales.
In the future, the company could become an even bigger alcohol business than it is now. In September, Tilray completed the acquisition of Atwater Brewery, a brand it acquired from Molson Coors. It has more than a dozen beverage brands in its portfolio, including SweetWater Brewing and Breckenridge Brewery, which investors may be most familiar with. And it wouldn’t be surprising if the company continued to delve deeper into the alcohol sector because that could be its best growth opportunity in the coming years.
The strategy of waiting for the United States to legalize marijuana is not paying off for Canadian cannabis companies. And the recent election results in the United States may only exacerbate the need for the company to become even less dependent on cannabis in the future.
Republicans will have control of the House and Senate for at least the next few years. And historically, the party has taken a tough stance on drugs, making prospects for full legalization in the near future appear dim. Investors should remember that even under more ideal circumstances in 2021, when Democrats were in control, there was no major legislation to pass for the marijuana industry.
The problem, however, is that many cannabis companies and investors have tied their hopes to the prospects of legalization and the opportunities it would open up. It is a strategy that has failed miserably.
For Tilray, this only increases the need to diversify further away from cannabis. There are international markets you could pursue, but that is an expensive strategy that again relies heavily on legalization in not just one but multiple countries. For the company to grow and approach profitability (it incurred a $35 million net loss last quarter), focusing on the alcohol and beverage business, where it generates the highest gross profit margins, would be the ideal strategy in this moment. .
That’s why I think it’s the path Tilray will follow. Cannabis may still be a part of its operations, but I suspect that as there is a greater need for strong cash flow and profitable operations, it will also divest some or most of its cannabis operations in Canada (where competition is fierce) and in international markets.
As Tilray diversifies further into the alcohol sector, I believe it will become a safer investment option. Then you won’t have to worry about legalization and can take advantage of economies of scale in the United States that can improve your prospects for long-term sustainable profitability.
Tilray, however, remains a high-risk stock to buy today due to its continued exposure to cannabis and unprofitable operations. It’s probably best for investors to take a wait-and-see approach, as Tilray still has a long way to go to prove it can be a good growth stock.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
Prediction: Tilray Brands Won’t Be a Cannabis Company in 5 Years was originally published by The Motley Fool
