Prospects may be improving for pot stocks. But, this alone is hardly reason to buy Tilray (NASDAQ:TLRY). After soaring after election day, Tilray stock pulled back. And with good reason. While the incoming U.S. presidential administration wants to decriminalize marijuana, full on legalization/commercialization remains years away.
Until laws are changed on the federal level, Canada-based pot companies like Tilray can’t enter the U.S. market. With this catalyst fading, I don’t see shares delivering more gains in the coming year. But, there are two other reasons why I’m more bearish on this pot play, as opposed to stronger ones like Canopy Growth (NASDAQ:CGC).
Firstly, its weak growth prospects. While sales could improve in the coming quarters as the company focuses on more profitable business lines, I’m not holding my breath. Secondly, Tilray’s balance sheet remains a hot mess. Even after recent debt conversions, more dilutive transactions may be required.
Put it all together, and this remains an “also ran” pot stock that belongs in your “avoid” pile. Sure, with high short interest, a squeeze could send shares parabolic once again. But, that’s a hardly a reason to be bullish.
Tilray Stock and the U.S. Legalization Timeline
Like with other pot stocks, speculators buying the headlines dived back into this name, on the heels of Joe Biden’s electoral victory. With Biden, and his running mate, Kamala Harris, pledging to decriminalize marijuana, more progressive pot policies are on the horizon.
Yet, that doesn’t mean we’ll be able to buy joints at the local convenience store within the next four years. That is to say, the timeline for full pot legalization remains many years away. Sure, with the U.S. House of Representatives voting for the MORE Act, at least decriminalization is making headway.
But, this proposed legislation likely won’t get through the still Republican-controlled U.S. Senate. With even decriminalization still a work in progress, full-on legalization in the near term remains a pipe dream.
With this big catalyst falling onto the back burner, it’s hard to see Tilray stock moving any higher than where it trades today (around $8.35 per share). And, with other negative factors at play, we could see shares move back to prior price levels (around $5 per share).
Other Factors Could Push Shares Lower
A delayed U.S. pot legalization timeline isn’t the only reason why Tilray shares could give up more of their recent gains. The company’s weak growth prospects, and overleveraged balance sheet, are key issues as well.
In the quarter ending Sept. 30, sales were flat compared to the prior year’s quarter. But, part of this was due to its discontinuation of bulk sales. Adult use sales surged 25.9% compared to Q3 2019. And, that wasn’t the only silver lining. Refocusing its efforts toward higher-margin products, the company managed to narrow its losses.
For the next quarterly earnings release, Tilray has some big expectations to live up to. Not only are analysts projecting revenue slightly above this quarter’s sales levels. The company itself anticipates finally getting to positive or breakeven non-GAAP EBITDA.
The question is, can they deliver? It’s possible. But, the issue here may be that last month’s run-up may already price this potential into shares. And, if the company fails to achieve this goal? Expect shares to give up most, if not all, of these gains.
However, that’s not the only factor that could drive shares lower from here. As I discussed, Tilray’s balance sheet remains a hot mess. Sure, convertible debt transactions of $124.3 million and $72.9 million, respectively, converted much of this debt into equity.
Yet, with these transactions came substantial shareholder dilution. Cutting the pie into many more slices, potential gains from here may be limited. To top it all off, dilution may not be over just yet.
With around $278 million in debt still outstanding, and continued losses, something’s got to give.
Avoid This ‘Also Ran’ Pot Stock
With full-on U.S. federal legalization still years away, it’s hard to see Tilray making any more gains from today’s price levels. And, with the company’s growth and balance sheet issues, it’s easy to see shares holding onto their recent gains, as post-election enthusiasm for this and other pot stocks starts to fade.
Granted, with high short-interest in Tilray shares, a squeeze could be in the cards. With around 22% of its outstanding shares sold short, just a breadcrumb of positive news could send shares soaring yet again, as bears cover their positions.
Yet, the potential for a short squeeze doesn’t make the bull case for Tilray stock. With better pot plays (like Canopy) out there, it’s best to avoid this “also ran” pot stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.