Forecast: Tilray Brands Likely won't Continue as a marijuana Business within the Next 5 Years
Around four years ago, Tilray Inc. (TLRY, down by 1.65%) disclosed its plan to merge with budget cannabis manufacturer Aphria, aiming to establish a larger, more dynamic, and international marijuana business. This announcement initiated great excitement among investors, potentially promising the best cannabis stock to possess.
However, since the announcement in December 2020, the stock has seen a decline of over 85%. The early hype surrounding the news led to a significant increase in the stock price, but the enthusiasm began to dwindle significantly.
In the upcoming five years, I predict that Tilray will adapt its business strategically, distancing itself from the cannabis sector. Even though cannabis might still constitute a small portion of its business, I anticipate Tilray no longer being recognized as a marijuana company for long.
Tilray has been broadening its horizons beyond cannabis
For quite some time, Tilray has maintained a cautiously optimistic stance toward the U.S.'s potential legalization of marijuana, opening up a vast new market for its Canadian operations. In the meantime, the company has expanded its operations to international cannabis markets and has acquired alcohol brands.
In its latest financial report for the first quarter of fiscal 2025, ending Aug. 31, Tilray reported a 13% annual sales growth, reaching $200 million. However, only 31% of those sales were derived from cannabis operations.
The company earns more revenue from distributing pharmaceuticals internationally (34%) than it does from its cannabis business. Its alcohol business now accounts for 28% of its overall revenue, and wellness remains its smallest revenue source, representing only 7% of total sales.
Future developments might see Tilray becoming even more of an alcohol business. In September, Tilray finalized the acquisition of Atwater Brewery, which was previously owned by Molson Coors. The company currently boasts more than a dozen beverage brands in its portfolio, such as SweetWater Brewing and Breckenridge Brewery, and it's reasonable to assume that the company will continue to further invest in the alcohol sector.
Election results may accelerate the demand for diversification
The approach of patiently waiting for the U.S. to legislate marijuana legalization has yet to bear fruit for Canadian cannabis companies, and recent U.S. election results could accentuate the necessity for Tilray to become less reliant on cannabis.
Over the next few years, Republicans will control both the House and the Senate, historically known for their stern stance on drugs. This, in turn, impedes the likelihood of marijuana legalization in the near future. It is important to remember that even in 2021, when the Democrats held control and seemed more favorable to legislative changes, no significant advancements were made for the marijuana industry.
However, many cannabis businesses and investors have heavily depended on the prospect of legalization and the opportunities it would bring. Sadly, this strategy has consistently proved to be unsuccessful.
In response, Tilray must consider further distancing itself from cannabis to ensure its survival. Although there are international markets that the company could explore, such an expansion method is costly, and reliance on legalization in multiple countries raises concerns. For Tilray to thrive and approach profitability (it incurred a net loss of $35 million last quarter), focusing on its alcohol and beverage business, where it earns the highest gross profit margins, would be the most prudent strategy at present.
Is Tilray stock a suitable investment today?
As Tilray starts to concentrate on the alcohol sector, it may become a safer investment alternative. It no longer has to focus on legalization and can reap the benefits of scale in the U.S., which can enhance its prospects for sustained, long-term profitability.
Keep in mind, however, that Tilray still remains a highly speculative investment choice due to its continued involvement in cannabis and its unprofitable operations. Taking a watchful stance as Tilray moves forward to prove its worth as a growth stock may be more suitable for potential investors.
Given Tilray's recent focus on expanding beyond cannabis, investing in its alcohol and beverage business could prove to be a more stable option due to reduced reliance on marijuana legalization. The company's acquisition of Atwater Brewery and its high gross profit margins in this sector indicate potential for sustained profitability.
Diversifying its portfolio beyond cannabis has become increasingly important for Tilray, as recent election results in the US have decreased the likelihood of marijuana legalization in the near future. With Republicans controlling both the House and Senate, it becomes crucial for cannabis companies like Tilray to explore other revenue streams to ensure their survival and approach profitability.
