That was almost four years ago Tilray brands (NASDAQ:TLRY) announced 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 exciting prospect for investors, potentially making it one of the best cannabis stocks to own.
But since that announcement in December 2020, the stock has fallen more than 85%. There was a lot of hype surrounding the news and shares skyrocketed shortly afterwards, but enthusiasm would wane considerably.
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I expect Tilray to continue developing its business over the next five years, but this time away from cannabis. It may still be a small part of the business, but I predict Tilray won’t be known as a marijuana company for much longer.
While Tilray has been patiently optimistic for years that the U.S. could legalize marijuana, resulting in a huge new growth opportunity for the Canada-based company, it has expanded its business in other ways. It has expanded into international cannabis markets and acquired alcohol brands.
Last month, the company reported earnings for the first quarter of fiscal 2025. For the period ending August 31, revenue grew 13% year-over-year to $200 million. But of that total, less than a third (31%) of revenue actually came from the cannabis business.
The company generates more money from distributing pharmaceutical products abroad (34%) than from what it is best known for: cannabis. And even the alcohol business now accounts for 28% of sales, with wellness being the smallest segment, accounting for 7% of total sales.
In the future, the company could become even more of an alcohol company than it is now. Tilray completed the acquisition of Atwater Brewery, a brand from which it was acquired, in September 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 alcohol, as that could be its best growth opportunity for years to come.
The strategy of waiting for the US to legalize marijuana is not paying off for Canadian cannabis companies. And the recent election results in the US may only increase 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 the prospects for full legalization in the near future seem bleak. Investors should remember that even under more ideal circumstances in 2021, when Democrats were in control, there was no significant piece of legislation that could be passed 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 that would arise. 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 it could pursue, but that is a costly strategy that again relies heavily on legalization in not just one but several countries. If the company wants to grow and move closer to profitability (it suffered a net loss of $35 million last quarter), focusing on the alcohol and beverage sector – where it generates the highest gross profit margins – would be the ideal strategy at this time. .
Therefore, I believe this is the path Tilray will follow. Cannabis may still be part of its business, but I suspect that because there is a greater need for strong cash flow and profitable operations, it will also have some or most of its cannabis business in Canada (where competition is fierce) and will divest in international markets.
As Tilray continues to diversify into alcohol, I believe this will become a safer investment option. Then the country would no longer have to worry about legalization and could benefit from economies of scale in the US, improving the prospects for long-term sustainable profitability.
However, Tilray remains a very risky stock to buy today due to its continued exposure to cannabis and unprofitable operations. Investors should probably wait and see, 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 Originally published by The Motley Fool
