Do NOT Put this Cannabis Stock In Your Pipe and Smoke It
Whether you’re risk-inclined or not, Tilray Brands (NASDAQ:TLRY) isn’t a promising investment as a cannabis stock, let alone an alcohol play.
The company has made some moves within the alcohol sector,which I’ll get to in a minute, but its core business continues to underperform.
The company’s recent earnings reinforce the view that this is likely to continue.
Here’s why this cannabis stock is still a sell in my books.
The Acquisition of Beer Brands
Tilray is expanding into alcohol by purchasing $85 million worth of beer brands from Anheuser-Busch InBev (NYSE:BUD), including Shock Top, Red Hook, and Widmer Brothers.
This move follows Tilray’s diversification strategy, which began with its acquisition of Aphria in 2021.
The news boosted TLRY stock by almost 12%, opening at $2.47 per share, with a market cap over $1.6 billion. Meanwhile, BUD stock declined 1% to open at $55.92, with a market cap of $98 billion.
The Wall Street Journal highlighted AB InBev’s Bud Light issues, but the trend continues for both sides. Major beer companies are shedding small brands to focus on top sellers. Constellation Brands (NYSE:STZ) sold its craft beer brands to focus on Modelo, the best-selling U.S. beer.
Tilray is strengthening its beer presence while consolidating its cannabis business, acquiring Montauk Brewing and Aphria’s brands.
Earnings Haven’t Provided Sustained Upside
Tilray reported an annual net loss of $1.4 billion for fiscal year 2023, but Q4 results exceeded expectations. The Q4 net loss of $120 million was an improvement from the previous year.
The $184.2 million net revenue in Q4 surpassed estimates, with adjusted EBITDA at $22.2 million, beating expectations.
Tilray’s key segments showed strong quarterly performance. Cannabis net revenue reached $64 million, up 21% year-over-year. Beverage alcohol sales grew to $32.4 million, up 43% year-over-year.
However, annual figures showed decline across segments. Cannabis revenue dropped 7.1%, distribution sales fell 0.3%, and wellness declined 11%.
Tilray is Investing in Hexo
In June, Tilray Brands finalized its purchase of Canadian cannabis producer Hexo Corp. It forms the biggest Canadian cannabis company in terms of revenue. This acquisition followed approval from Hexo shareholders on June 14.
In April 2022, Tilray and Hexo established a strategic alliance involving debt exchange for the right to buy Hexo shares. A year later, they disclosed an acquisition deal, costing about $56 million.
Each Hexo share resulted in 0.4352 Tilray shares, with 19.5 million issued. Hexo’s common shares will soon be delisted from the TSX and Nasdaq as Tilray’s subsidiary. This acquisition strengthens
Tilray’s leading position in the Canadian cannabis market and enhances sales and distribution networks for growth.
I’m skeptical about Tilray’s acquisition of Hexo, as using shares to fund the $56 million deal could dilute investors. Hexo’s recent financials also raise concerns, with losses of CA$301 million and revenue of CA$148.1 million over the past year.
What Now
Be cautious; while there are positives, investing in Tilray carries risks due to competition, regulations, and stock volatility.
Tilray is a risky choice. There are plenty of other cannabis stocks to invest in, as well as the option of avoiding the industry altogether – both of which appear be safer strategies due to the uncertainty around U.S. legalization.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
