Where Will Tilray Brands Be in 3 Years?

Can this beaten-down pot stock turn things around?

There’s growing excitement in the cannabis industry that marijuana reform may finally be happening in the U.S. The Drug Enforcement Administration (DEA) may soon reschedule marijuana from a schedule I substance down to a less restrictive schedule III classification, and the development has investors bullish on what it might mean for many pot stocks.

Tilray Brands (TLRY) is one of the most recognizable pot stocks on the market, with a valuation of around $1.5 billion. The Canadian pot producer has evolved over the years to become more diversified as it eyes a potentially attractive growth opportunity in the future in the U.S. cannabis industry. Here’s a look at what might be in store for the company over the next three years, and whether it may be worth investing in Tilray today.

Will Tilray be operating in the U.S. cannabis market?

Will Tilray be operating in the U.S. cannabis market? This is likely the burning question many investors who buy shares of Tilray are thinking about today. That’s because if Tilray is able to enter the U.S. market within the next three years, that means significant reform has taken place, and the business will probably be growing at a feverish pace, which could attract many growth investors in the process.

But despite all the optimism, I don’t expect this to be a probable scenario. Even if the DEA reschedules marijuana to a schedule III classification, that doesn’t mean legalization will follow. There’s a bit more talk about marijuana reform this year, and while there does appear to be some progress on that front, I think it has more to do with it being an election year than anything else. Next year pot could be on the back burner again as more pressing issues, such as inflation and a potentially weaker economy, may take precedence for the government.

Tilray may get bigger via acquisitions

Even if Tilray can’t enter the U.S. market, it would be surprising if the company were to stop its pursuit of growth. Over the years, Tilray has acquired other cannabis companies, and it has even expanded into alcohol, all in the name of growing its business any way that it can.

During its most recent quarter, which ended on Feb. 29, Tilray reported revenue of $188.3 million, which was up nearly 30% year over year. And a big part of the reason was its beverage and alcohol segment, which increased by 165% to $54.7 million. What’s notable is that given Tilray’s diversification, that still put the segment in third spot, behind both Tilray’s distribution business (it generated $56.8 million) and cannabis (pot sales totaled $63.4 million).

Diversification has played an important role in Tilray’s growth in recent years, and I don’t expect that will change anytime soon. The company isn’t interested in sitting idle and waiting for the U.S. pot market to open up. And earlier this year, CEO Irwin Simon said that he was still looking for more deals to help grow the business.

Investors shouldn’t expect profitability

Tilray and other cannabis companies often focus on profitability in terms of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), and while they may be profitable on that basis, that is often far different from true accounting income. Last quarter, Tilray recorded adjusted EBITDA of $10.2 million, but its net loss was a whopping $105 million.

I don’t expect Tilray’s bottom line will get into the black within three years, for two reasons.

The first is that its margins are fairly light. Last quarter Tilray’s gross profit margin was just 26%. At such a low rate, the company would need to be operating a tight ship and closely managing its costs to ensure it has a realistic shot at breaking even. That’s not the case for Tilray, nor does it do enough in volume for its gross profit to have much hope of covering operating expenses. For example, general and administrative costs totaled $39.9 million last quarter, and they alone ate up nearly 81% of Tilray gross profit of $49.4 million. After factoring in amortization, selling expenses, marketing costs, and other expenses, there’s little hope of the company getting out of the red.

The second reason is that Tilray is still gearing up for more acquisitions. That means there are going to be more costs and more inefficiencies (at least in the short term), which will make it even more difficult for the company to improve upon its earnings. Until it settles its operations, and acquisitions aren’t a key part of its growth, odds are Tilray’s bottom line will remain in the red for the foreseeable future.

Is Tilray stock worth buying today?

In the past three years, Tilray’s stock has lost around 90% of its value. I don’t think the next three years will be as bad for the business, as rising interest rates and concerns about the economy have made investors particularly wary of risky stocks such as Tilray in recent years.

But that doesn’t mean that I would buy the stock right now. The next three years may not be as bad for Tilray, but I still don’t expect the stock to prove to be a good investment during that stretch. Without a path to profitability and little hope for the U.S. pot market to open up, I’m not optimistic that Tilray’s stock will be able to turn things around in the next three years and be a good buy.

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