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Will Tilray Be Among the Survivors in the Cannabis Industry?

TLRY stock has upside potential but it’s also very risky

I’ve long been a fan of the cannabis industry because of its transformative nature. With legalization, government can now tax what was once a robust but illegal enterprise. Therefore, it wasn’t surprising that Tilray (NASDAQ:TLRY) skyrocketed following its initial public offering. But the realities of an imbalanced supply chain led to TLRY stock crashing back down to earth. Then came the novel coronavirus, a crisis that the beleaguered sector absolutely did not need.

tlry stock
Source: Jarretera /

At the same time, some positives have come from the dramatic changes in global societies. In Tilray’s home market of Canada, the government temporarily shut down non-essential businesses. Further, Canadian Prime Minister Justin Trudeau urged his fellow citizens to stay at home, at one point threatening law enforcement action for non-compliance. However, most provinces and territories of Canada deemed dispensaries as essential, providing a lifeline to green consumers.

Furthermore, the social isolation has been very tough for arguably most people in forced quarantine jurisdictions. Multiple scientific reports have proven that we humans are geared for socialization. Thus, putting an end to this necessity – especially so abruptly – has left folks grappling for coping mechanisms. And this is where TLRY stock offers upside potential in what has otherwise been an ugly situation.

Of course, the family-friendly solution to whittling away the time is to engage morally neutral platforms, such as streaming. But for younger people, their solution of choice is likely cannabis.

Not surprisingly, millennials have represented the main driver of the cannabis industry. Unlike prior generations, this demographic prefers weed over alcohol. In this period of forced quarantines and social distancing, nothing provides immediate relief like lighting up. But is this enough for TLRY stock?

TLRY Stock Faces an Uncertain Future

What makes the cannabis sector so perplexing to investors right now is that the broader concept remains appealing. However, it’s figuring out which competitors will survive that makes this market so frustrating.

In the U.S., bipartisan momentum is growing for calls to end dependency on China, specifically for medicines and critical supplies. As it turns out, Tilray focuses on the medicinal and therapeutic aspects of the cannabis plant.

Although it’s a big if, should cannabis offer proven medical benefits, this potentially opens the door for a North American mitigation of certain medical supply chains. While we’re on the speculative route, some loose evidence suggests that cannabis, under specific conditions, could be beneficial in addressing the coronavirus.

Although interesting, at this juncture, these factors are very long-term speculative considerations for TLRY stock. Frankly, much more immediate headwinds are hurting Tilray. If these aren’t addressed effectively, the company probably won’t be around to enjoy the possibility of the aforementioned long-term catalysts.

One of the old but still frustrating impediments to TLRY stock is the Canadian supply chain problem. As I explained in prior InvestorPlace articles, the Canadian government has not done a great job in matching supply with demand for their retail cannabis market. Prior to the Covid-19 pandemic, this represented an inconvenience to consumers. Now, it may open the door wider to the black market.

Cannabis store density in Canadian market
Source: Chart by Josh Enomoto

To be fair, the black market has remained a challenge to legalization. But with global economies threatening to enter a prolonged recession, funds have suddenly become extremely tight for everyday consumers. This circumstance only incentivizes the black market to undercut the legal competition.

Worse, there’s not much that legal players can do about it. Obviously, law enforcement agencies currently have bigger fish to fry.

Tilray Is Downgraded to a Believable but Risky Bet

So, how should investors approach TLRY stock? Although I like the sector, it has become a game of musical chairs. Let’s face it – the cannabis market was stressed before the chaotic events of this year. The coronavirus did nothing to improve this circumstance.

On the other hand, the economic and geopolitical changes bode well for the cannabis industry longer term. Should the U.S. economy suffer a prolonged downturn, I doubt that either the Trump administration nor a possible Democratic administration has the luxury of denying a viable revenue maker. Plus, medical marijuana may offer a solution to some of our medical supply chain dilemmas.

Ultimately, TLRY stock is believable but it also has become very risky. If you like cannabis, you may want to instead consider better financially backed organizations, such as Canopy Growth (NYSE:CGC) or Cronos Group (NASDAQ:CRON). Not that these two are sure things, but in my opinion, they have an extra measure of confidence in dealing with these unprecedented times.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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