Any Investment In Tilray Will Likely Go Up In Smoke

As it slides into penny stock territory, there seems to be little reason for investors to buy beaten down cannabis producer Tilray (NASDAQ:TLRY). The share price of Canada’s largest cannabis company now sits at $5.84, down 57% over the past six months and TLRY stock is quickly approaching the $5 penny stock threshold.

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

TLRY stock is now 91% below its 52-week high of $67 back in February 2021. That was when the shares were treated as a meme stock and put in a short squeeze by the retail investors who congregate over at r/WallStreetBets. Since then, the stock has collapsed.

While some investors might be tempted to buy Tilray stock at current levels believing TLRY has found the bottom, keep in mind that the share price has declined nearly 25% in the past month alone.

Deteriorating Finances

The slump in TLRY comes as the company’s finances continue to deteriorate.

Toronto-based Tilray reported a third quarter net loss of $35 million, 59% greater than the net loss of $22 million recorded a year earlier. And while the company has set a goal of surpassing $4 billion in annual revenues by 2024, revenues currently sit at $620 million a year. It’s good to dream big but let’s keep it realistic.

To be fair, Tilray isn’t the only cannabis company struggling right now. The entire sector is in retreat. The Alternative Harvest ETF (NYSEARCA:MJ), the world’s biggest cannabis ETF that “measures the performance of companies within the cannabis ecosystem,” is down nearly 50% over the last 12 months, including a year-to-date decline of 14%. Tilray is the fourth-largest holding in the MJ ETF, with a 6.14% weighting in the fund.

The American Market

Like other Canadian cannabis producers, Tilray is holding out hope for broader legalization of the recreational drug in the U.S., where the market is more than 10 times larger than that in the Great White North. This time last year, rival cannabis company Canopy Growth (NASDAQ:CGC) Chief Executive Officer (CEO) David Klein confidently predicted that his company would be operating in the U.S. within 12 months. But cannabis legalization, particularly at the federal level, has become a low priority amid the Covid-19 pandemic.

Tilray CEO Irwin Simon recently said on a call with analysts that he doesn’t see the U.S. market opening up to foreign cannabis firms for at least two years, if not longer. Currently, 18 U.S. states have legalized cannabis while the federal government in Washington, D.C. has put the issue on the back burner over more pressing issues such as infrastructure funding and voter rights.

The U.S. cannabis market is forecast to reach $43 billion by 2025 (compared to about $15 billion last year) as states gradually legalize the drug. However, the illegal cannabis market in America is estimated to be worth $100 billion a year, providing plenty of room for the legal market to grow and mature in coming years. For now, Canadian cannabis companies are left to look longingly at the American market from north of the border.

Acquisitions and Cost Cutting

While it waits for the U.S. market to open, Tilray has focused on other foreign jurisdictions such as Germany, the biggest market in Europe for medical cannabis, where Tilray currently holds a 20% market share. Germany is rumored to be considering legalizing cannabis as soon as this year.

As it seeks to gain footholds and expand its presence in various markets, Tilray has been undertaking a series of small acquisitions such as SweetWater Brewing in the U.S. At the same time, Tilray is in the midst of an aggressive cost cutting program aimed at saving it $100 million annually by 2023.

Tilray recently said that its savings efforts are going better than expected and that it is running ahead of schedule in terms of reducing company-wide costs. The cost cutting effort has been undertaken even as Tilray struggles with oversupply issues that have forced it to lower prices across its various cannabis products.

Do Not Buy TLRY Stock

Things are not improving with Tilray. The entire Canadian cannabis sector is in limbo while it waits for greater movement on legalization in the U.S. Until the American market fully opens to Canadian producers, Tilray and other cannabis stocks will continue to struggle.

Given the steady decline in its share price, and that it is on the verge of becoming a penny stock, investors should stay far away from Tilray until a positive catalyst occurs and it becomes clear that the shares have bottomed. Right now, TLRY stock is not a buy.

Disclosure: On the date of publication, Joel Baglole 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.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.


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