Is Tilray Making a Colossal Mistake?

Cannabis producer Tilray Brands (NASDAQ: TLRY) looked like a promising investment when it announced in 2020 that it was merging with then-rival Aphria. It was dubbed the “largest global cannabis company” at the time and it looked like it had a real chance of dominating the Canadian pot sector.

But since then, I’ve become less optimistic about the business. The company’s overly aggressive expansion follows in the footsteps of notable failures in the cannabis industry. It makes me wonder whether the stock is simply too risky to invest in today.

Tilray’s recent deals make its business riskier

The reason I’m losing hope in Tilray is that it has been making aggressive moves that might jeopardize its overall operations. While the deal with Aphria was smart since the company was a low-cost producer, recent announcements involving MedMen and Hexo are less encouraging.

Although it hasn’t formally acquired those businesses, it has made deals to potentially take an equity stake in them down the road. In August 2021, Tilray announced it had acquired convertible notes of multi-state marijuana operator MedMen. Due to the federal ban on marijuana in the U.S., Tilray can’t take an equity stake in the business and continue trading on the Nasdaq. Such a transaction likely won’t take place until legalization happens (or the laws change significantly enough that the transaction won’t leave Tilray in violation of U.S. federal law.)

MedMen would give Tilray a fast footprint in the U.S. market, but at a big cost. MedMen’s operations are unprofitable, incurring losses of $81 million over the six-month period ending Dec. 25, 2021. During that time, it burned through about $50 million over the course of its day-to-day operating activities.

With Hexo, Tilray has also acquired debt in the form of convertible notes. There’s nothing stopping it from making that conversion now, and if it does, it could end up taking a 37% stake in Hexo. Like MedMen, Hexo is also unprofitable and continually burning through cash. The situation has been so troubling with Hexo that even auditors sounded warning bells about the company’s future recently, stating on its most recent earnings report that there was “substantial doubt as to the ability of the company to meet its obligations as they come due.”

Neither of these deals is terribly exciting, and both threaten to worsen Tilray in the long run. And this could all be due to the pressure Tilray has put on itself to reach aggressive sales targets.

A $4 billion sales projection has become an albatross

Last year, Tilray forecasted that it could top $4 billion in annual sales by 2024. The projection is based on incredibly favorable assumptions, including dominance in the Canadian pot market, strong international growth, and penetrating the U.S. market. And it expects all that to happen within just a few years. At its current run rate of about $620 million in annual revenue, the business has a long way to go in reaching that goal. 

That’s one of the reasons I expected there to be more acquisitions on the horizon, as adding more companies into the mix is the easiest and quickest way to grow revenue. The problem is that it may not make the business more investable in the end.

Tilray likes to boast about its streak of reporting positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) — currently, it sits at 11 straight quarters. However, I don’t expect that to continue if it’s taking on exposure to troubled businesses like MedMen and Hexo. It’s a recipe for disaster.

And that’s why although Tilray’s stock has fallen over 70% in the past year (more than the Horizons Marijuana Life Sciences ETF‘s decline of 55%), more losses may be inevitable for its shareholders.

Is Tilray too risky to invest in?

Previously, I would have said Tilray was one of the safest Canadian marijuana companies to invest in. But now, I see it following patterns other companies like Aurora Cannabis and Canopy Growth have fallen into, by being too aggressive on acquisitions and expanding, all in the name of market share and expanding sales. And that’s why I would avoid this stock, as its business may be in rough shape in the years ahead if it continues on this path.