Once known only as Tilray, the Canadian cannabis producer let investors know Jan. 10 while releasing its second quarter of fiscal year 2022 results that moving forward; it will be known as Tilray Brands (NASDAQ:TLRY). In turn, TLRY stock briefly jumped on the news.
Cynical investors might view CEO Irwin Simon’s announcement that the company’s evolution into a consumer packaged goods company, hence the new name, from a Canadian licensed cannabis producer as an act of desperation.
They’d be half right. Here’s why.
TLRY Stock Is Hemorrhaging
Tilray’s share price ended 2020 at $8.26 and ended 2021 at $7.03. Now, TLRY stock is trading at $6.22 per share to kick off the second month of 2022. Down more than 65% over the past year, you could be excused for thinking this isn’t so bad given the general lethargy of cannabis stocks.
For example, the AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) is down 38% since the end of 2020; ETFMG Alternative Harvest ETF (NYSEARCA:MJ) — where Tilray Brands is the fourth-largest holding — is down 29% over the same period.
However, the problem is that the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 22% over these last 12 months. So on a relative basis, it’s beating TLRY stock by 87%.
That’s never something a CEO wants to see. You’re supposed to be outperforming the markets, not lagging them.
Investors in 2021 made all kinds of insane bets on crappy stocks, but in the end, fundamentals always win out.
Simon has seen his share price drop to near penny-stock status. He had to do something to stop the bleeding. And by changing the name to Tilray Brands, he’s acknowledging that federal legalization might never come. In turn, it’s time to go on offense by telling a story that’s bigger than cannabis.
Three years ago, Simon would have been booted out of his job if he proposed pushing away from cannabis. Now,though, it makes a whole lot of sense — and here’s why.
Tilray Has Some Decent Brands
Simon appeared on Yahoo Finance on Jan. 18 to discuss the transition to consumer packaged goods company. He had some nice things to say about his Canadian cannabis business:
“We have a strong business in Canada with 12 brands. And with that, legalized — cannabis is legal — adult use, medical use, edibles, and drinks. But Canada is 37 million people in size, and there’s only so much you can build in Canada.”
He went on to say there was plenty of business in Europe, including in Germany, Portugal and possibly France. With that, shareholders should be excited about the opportunities over the pond.
Then, he had the following to say about the U.S.:
“When it comes to the US, listen, you know, last year this time with the Biden administration coming into play and lots of discussion around cannabis, we thought legalization or safe bank could be around the corner. And that doesn’t look like it’s going to happen. And we could see a change in the House and the Senate come November of this year. So with that, what I want to ensure we do is, hey, have a diversified company.”
The reality is that Tilray made several acquisitions and non-cannabis-related brand extensions over the past year to diversify its business.
In December, it acquired Breckenridge Distillery, a producer of bourbon and other craft spirits. It’s expected to be immediately accretive to earnings.
“We see tremendous potential for Breckenridge and our existing SweetWater brand to complement each other, expanding their respective reach and driving further profitable growth in our beverage alcohol segment,” Simon stated in its Dec. 8 press release.
In November, SweetWater entered the ready-to-drink (RTD) category with the SweetWater Riff vodka cocktail launch. It’s important to remember that Tilray inherited SweetWater when it merged with Aphria in May 2021. Aphria paid $300 million for SweetWater, so it’s good to see they’re expanding the craft brewer’s footprint in the alcoholic beverage market.
Moreover, SweetWater acquired California beer brands Green Flash Brewing and Alpine Beer in late December. With that in mind, the alcoholic beverage industry is about two things: scale and shelf space. This gives SweetWater more of both.
Bottom Line on TLRY Stock
Collectively, Tilray’s Q2 2022 results had some good and bad things in its report to shareholders.
The good news included net cannabis revenue grew 7% year-over-year (YOY), beverage alcohol revenue benefited from a full quarter with SweetWater under its operation and net revenue grew by 20% YOY to $155.2 million. As a result, it generated positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the 11th-consecutive quarter.
On the downside, though, the most glaring negative is that Canadian adult-use cannabis revenue decreased by 14.9% to $49.5 million. However, it did manage to hang on to the top market share in this segment of the Canadian cannabis market. Additionally, SweetWater’s revenue stepped in to fill the gap.
The reality here is that Tilray’s pivot started when Aphria bought SweetWater in November 2020. Now that more pieces have been added to the puzzle, it made sense to rename its business to reflect a wider audience.
The risk is that it spends too much money on non-cannabis acquisitions and product launches, the federal government does a complete about-turn and passes legislation, and it doesn’t have enough dry powder to make a cannabis move in the U.S.
Wisely, Simon sees that risk as low given Congress’ inability to get legislation passed of any kind. And with TLRY stock hanging around $6 per share, aggressive investors ought to be nibbling.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
