Tilray has been in purgatory as Congress stalls on legalizing weed. Is it time to buy?

Shares of cannabis purveyor Tilray Brands (TLRY)(TSX:TLRY) have declined 20% over the past 30 days amid a broad market sell-off. Longer-term, the one-time high-flier has been dragged down by repeated delays on Capitol Hill, as Congress drags its heels on the federal decriminalization of marijuana in the U.S.

Is now the time to buy, as a bet that the U.S. will eventually provide a path for legal sales of the product?

U.S. Legalization Purgatory

Based in Canada, Tilray produces and markets a variety of cannabis products for the medical and recreational markets. It also sells hemp-based foods through a subsidiary to grocers like Whole Foods, cannabis-related wellness products and craft alcoholic beverages.

Its primary markets are Canada and the U.S., although it has been gaining traction in Europe as well.

Tilray has also been very active on the M&A front. The company acquired fellow cannabis marketer Aphria in May 2021 and recently bought a hefty chunk of debt from Hexo (HEXO), which could be eventually converted to a 50% equity stake.

Tilray has also diversified into alcoholic beverages through acquisitions such as Atlanta-based SweetWater Brewing and Colorado-based Breckenridge Distillery.

Cannabis stock performance has largely echoed that of the broader market, albeit much with more dramatic swings. But the stocks have also suffered as legislation to legalize weed on the U.S. federal level languishes in Congress.

While Tilray’s stock has slid substantially over the past 30 days, it’s fared better than many of its peers. Shares of Hexo (HEXO) (TSX:HEXO), whose subsidiary recently filed for protection from creditors, have sunk 18% while shares of Canopy Growth (CGC) (TSX:WEED) have plunged 31% and Aurora (ACB)(TSX:ACB) 48%. Sundial Growers (SNDL) and Curaleaf (OTCPK:CURLF)(CSE:CURA) have performed better, but they have still shown significant losses, sliding 8% and 15%, respectively, as of June 23.

Is TLRY a Buy?

Tilray’s stock hit a 52-week low on June 16 of $3.02, an 84% drop from the high it hit nearly a year earlier. On June 29, 2021, share reached a 52-week high of $19.24.

While Tilray has been actively diversifying, a large chunk of its revenue still comes from adult-use cannabis sales in Canada. According to Tilray’s Q3 earnings report, $55M of the $152M it reported in revenue was generated by cannabis sales, with $44M attributed to the Canadian adult-use market.

In addition to reporting 23% year-over-year revenue growth, Tilray also reaffirmed its guidance of achieving annual revenue of $4B by the end of fiscal 2024.

Alcoholic beverages have also become increasingly important to the company, contributing $20M to the topline in Q3 while wellness products, such as CBD oils and supplements, accounted for another $15M. The company also swung to a quarterly net profit of $53M after reporting a hefty loss the previous year.

Even with these bright spots, the potentially massive U.S. cannabis market remains elusive. While a decriminalization bill was passed by the House in March, it has yet to be voted on by the U.S. Senate. Likewise, the SAFE Banking Act, which would allow cannabis companies to fully participate in the U.S. banking system, has also been stalled.

In an interview with CNBC in late April, Tilray Chief Executive Officer Irwin Simon said he believes the company would see $1.5B in U.S. sales if cannabis was legalized on the federal level. He added that he saw legalization in Europe occurring within “the next year or so.”

Another overhang on Tilray’s stock has been perceived weakness in the Canadian adult-use market due to increased competition and macroeconomic headwinds.

CIBC analysts, in a note released on May 1, said that while they believe the company’s growth targets appear to be “aggressive,” they also expect “meaningful growth via accelerated M&A and ongoing evolution of the company beyond cannabis.”

“We continue to believe the stock’s primary catalyst is US regulatory reform,” the CIBC analysts said, adding that in the meantime “improved profitability could entice more institutional investors.” CIBC maintained its neutral rating on the stock.

Piper Sandler analysts said they were concerned about the company’s momentum in a note dated June 14 and slashed their price target to $3 from $6.

“We believe Tilray stands out from competitors with its direct access to the EU and its positive EBITDA margins, thought further share loss in the Canadian recreational market, softer than expected beer sales, and an unfavorable currency exchange are weighing on momentum in fiscal Q4,” said the analysts, who maintained their Neutral rating.

Wall Street analysts, on average, rate Tilray a Hold. Of the 20 analysts tracked by Seeking Alpha, four rated it a Strong Buy, 14 a Hold and two a Sell. SA authors also largely rated the stock a Hold.

Seeking Alpha’s Quant Rating system also viewed the stock as a Hold. The company earned an A for revisions and an A- for valuation and A for growth, as well as a B+ for profitability. However, the tracking tool for quantitative measures gave the stock a D+ for momentum.

For more on Tilray, check out SA contributor JR Research’s “Tilray Stock: Don’t Even Think About It” or SA contributor Wright’s Research’s “Tilray Brands: Almost Good Enough.”