Shares of Tilray Brands (TLRY -5.66%) and other Canadian-based cannabis producers often get a boost when there are talks of legalizing marijuana in the U.S. For these businesses, the prospect of a big new market to the south to tap into represents an incredible growth opportunity that gets investors incredibly bullish.
But legalization isn’t something cannabis investors should be banking on. There’s no reason to believe it is inevitable, and assuming it will happen may put investors in a vulnerable position.
There’s little reason to expect legalization will happen anytime soon
When the Democrats took control of both the House and Senate in early 2021, many people in the cannabis industry believed that marijuana reform would finally happen. Canopy Growth CEO David Klein was among the most bullish, predicting that his company would be operating in the U.S. within a year.
However, despite all the excitement, nothing has happened. Bills to legalize marijuana don’t appear likely to be going anywhere. And even the more modest SAFE Banking Act, which would allow the industry to gain access to banking services without any problems, hasn’t come into law. Last year, there were reports that White House staff was let go due to past marijuana use, suggesting that the current administration isn’t as pro-marijuana as the public may have hoped.
Meanwhile, midterm elections are coming up this year, and the danger is that the Democrats may lose control of Congress; typically, the president’s party loses seats in the House and Senate during the midterms. If that happens this year, the window of opportunity to pass any meaningful legislation on marijuana may be in jeopardy, as Republicans generally have a less favorable opinion of pot.
For these reasons, I don’t expect legalization will happen within the next few years.
Without hopes of legalization, Tilray may struggle
Tilray’s stock jumped 10% in a single day last month after U.S. Senator Ron Wyden expressed hope that marijuana reform could take place this year. The stock would eventually give those gains back, but it shows just how much power even the suggestion of marijuana reform has on Tilray’s investors.
If legalization doesn’t take place soon, it puts Tilray Brands in a tough spot. Not only would that all but guarantee the company won’t hit its ambitious target of $4 billion in annual revenue by 2024, but that would also mean its growth rate may continue to decline.
Data by YCharts.
If growth investors don’t see much reason for optimism, shares of the company will likely fall even further than they already have. In the past year, Tilray’s stock has declined by 75% — far worse than the 61% drop in value that the Horizons Marijuana Life Sciences ETF has experienced.
Tilray isn’t a buy, even at its reduced valuation
It’s next to impossible to forecast when marijuana legalization may take place in the U.S. While the cannabis industry and the CEOs running marijuana businesses would like to convince investors that it is coming soon, there’s no reason to believe that will be the case. It could very well be years before that happens.
The risk for Tilray investors is that without legalization, the company may become more aggressive in looking for other businesses to acquire for the sake of boosting market share and growing its sales. That could mean more dilution, which would put even more pressure on an already beaten-up stock price.
Investors are better off avoiding the cannabis stock — between its aggressive forecast for 2024 and legalization not likely to happen by then, things could go from bad to worse for Tilray in the next few years.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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