The Black Market Imposes a Dark Cloud on Tilray

If I had things my way, I wouldn’t open my mouth too much about marijuana investments. That’s because companies like Tilray (NASDAQ:TLRY) represent a balancing act. But as you know from your own experiences, balancing acts tend to fall toward one direction or another. Figuring out which is the perplexing challenge behind TLRY stock.

Tilray (TLRY) logo on a web browser.
Source: Jarretera / Shutterstock.com

Fundamentally, many factors exist that are encouraging for Tilray and the vast cannabis space. For one thing, you have President Joe Biden and the Democrats controlling Congress (albeit with the tiniest of margins). Admittedly, Biden disappointed the progressive arm of the left, choosing to stay in the middle for many contentious issues. This includes marijuana legalization, where he has only pledged to decriminalize it.

Still, hope remains for TLRY stock and its ilk. Primarily, opening the doors to full legalization of weed will theoretically create a viable North American (as in non-Chinese, for emphasis) economic ecosystem. Prior to the pandemic, the cannabis industry employed a sector high 243,700 Americans. In 2019, the botanical market saw job growth of 15% against 2018 results.

Better yet, this is an economy where America and its longstanding partner Canada has a distinct advantage, not only in size of labor force but also land resources. As many politicians have complained, we don’t make stuff anymore. Well, we can make weed – we just need the legal green light.

And that’s the beauty of a potential legalization initiative in the U.S. Many other countries, even generally conservative Japan, are reconsidering anti-cannabis laws. For instance, cannabidiol (CBD) is legal in Japan and the likelihood of a robust cannabis market suggests that a broader discourse on full legalization will take place.

Considering Tilray’s experience in the international market, this bodes well for TLRY stock down the line. But that doesn’t exempt shares from more immediate concerns.

Black Market Cannabis Poses a Threat to TLRY Stock

In 2019, illicit cannabis sales in California totaled $8.7 billion, nearly three times more than the $3.1 billion in sales for legally sourced cannabis. However, experts believe that by 2024, legal cannabis sales in the Golden State will hit $7.2 billion, while illegal weed will drop down to $6.4 billion.

While seemingly encouraging for TLRY stock, some headwinds exist regarding this narrative. First, $6.4 billion is a ton of sales for an illicit market where legal options are readily available, especially in green-friendly California. Second, it’s entirely possible that illegal sales will continue to be the dominant player in the cannabis market.

A more recent report shows that Americans likely spent $60 billion on illegally sourced marijuana in 2020. According to Leafly.com:

Studies estimate that between 12% to 14% of adult Americans enjoy cannabis. That’s a massive group of consumers — and they spend billions of dollars every year on marijuana. Unfortunately, according to a new report, more than 71% of that spending goes to the illicit market, due to various forms of cannabis prohibition enforced in 39 states.

True, much of this black-market spending occurs because most states have some form of marijuana restrictions (keep in mind that CBD is different because it doesn’t impart a psychoactive effect). For instance, Texas is a massive state and sure enough, it leads all non-legal states for marijuana purchases.

On paper, full legalization will bring this demand to the legal side of the ledger, which potentially could lift TLRY stock. But the ratio of illicit-to-legal sales in California in 2019 shouldn’t be ignored. It implies, though it’s not a perfect indicator, that states legalizing marijuana would not eliminate illegal weed.

In my opinion, the economic crisis from the pandemic exacerbates this situation for TLRY stock. Arguably, people aren’t looking for quality in their weed so much as they’re looking for a good deal.

The Chart Might Be a Tell

Another concern related to the pandemic is the response from law enforcement. Right now, being a police officer is a thankless job in America and that’s incredibly regrettable. We should learn to have an educated discourse on social equity without impugning the vast majority of officers that keep our communities safe.

Anyways, police resources are stretched. I’ve got to believe that in this crazy period we’re living in that cops have much better things to do than chase people down for buying street weed. That just incentives the black market even more.

Interestingly, while this is going on, TLRY stock appears to be charting a bearish head-and-shoulders pattern. Pull up its chart: I see shoulders on Jan. 15 and March 15 and the head on Feb. 10. Further, the time of writing price action is below the 50-day moving average, a sign of near-term weakness.

Given the evidence, I think prospective buyers of TLRY stock should wait. Don’t misread this as me hating the underlying company. I’m just being realistic regarding the fundamental and technical circumstances of the moment.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.


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