The stock has been a terrible investment in recent years.
It’s probably best to avoid penny stocks, companies trading for less than $5. If these were attractive businesses, investors, especially those hunting for a bargain, would swoop in and purchase their shares, bidding them up in the process. Though some penny stocks will end up experiencing this very phenomenon and delivering market-beating performances in the long run, most won’t. Some might think Tilray Brands (TLRY 3.21%), a company whose shares are trading for just $2 as of this writing, has a shot at being one of those penny stocks on the way to outsized returns.
It is one of the leaders in an industry whose regulatory landscape could improve in the coming years. However, the cannabis specialist still isn’t an attractive stock — quite the opposite.
The regulatory challenge
Canada legalized recreational use of cannabis for adults in 2018, a move that attracted a bit of a gold rush. Pot growers started popping up like weeds while investors rushed to buy shares of what looked like the most promising players in the field. Canada provides a good counterexample for the claim that friendlier cannabis laws will automatically lead to great returns in the industry. It’s hard to find a single cannabis stock that has delivered decent returns since 2018. Tilray is no exception.
Though it has a leading market share in Canada, organic revenue growth has been inconsistent, and the company increased its top line over the years, largely thanks to acquisitions. Meanwhile, profits have been elusive, and gross margins have been up and down.
TLRY Revenue (Quarterly) data by YCharts
Tilray’s results are partly because, despite Canada legalizing cannabis, it established stringent rules regarding who could obtain retail licenses. Meanwhile, many consumers kept buying their products through illegal channels. The German market might run into many of the same problems. Though the country recently legalized some recreational uses of cannabis, there will be no retail stores. Instead, there will be cannabis social clubs that are allowed to grow the substance and share it among club members — but these will be operated as nonprofit organizations.
No one under 18 can join one of these cannabis clubs, no one can join more than one, and no one outside of it is allowed to obtain cannabis through it. Social cannabis clubs must also obtain permission from the government to operate. Alternatively, people can grow cannabis at home, but only up to three plants per person. These rules (and there are many more) don’t sound conducive to helping Tilray substantially improve its financial results.
Tilray is diversifying, but it might not matter
Tilray’s business is now far more than just cannabis. The company’s push into beverages looks particularly exciting, at least on the surface. Thanks to a string of acquisitions, Tilray is now the fifth-largest craft brewer in the U.S. Tilray’s beverage business generally carries stronger margins. For its fiscal year 2024, which ended May 31, the company’s adjusted gross margin for its beverage business was 46%. Tilray’s total adjusted gross margin was just 30%.
The company just announced yet another move in this field. It will acquire four craft beer breweries from Molson Coors Beverage. Here’s the problem: These acquisitions are starting to take a toll on the company’s balance sheet. As of the end of its fiscal year 2024, Tilray’s goodwill represented about 47.6% of its total assets — that’s pretty high. Goodwill can represent the difference between the value of a company and the price an acquirer paid for it. Too much goodwill can lead to writedowns and decrease the bottom line. So, this could become an issue in the future.
Tilray still hopes that once pot becomes legal at the federal level in the U.S., it will be in a better position than its competitors to dominate the market for cannabis-infused drinks. There’s no guarantee that the U.S. will move in that direction, and even if it does, there is no guarantee that it won’t look like the Canadian experience. Whether it’s cannabis or beverages, Tilray’s prospects look uncertain at best, and the company’s track record certainly does not inspire confidence. This penny stock doesn’t look like a long-term winner, so investors should stay far away.