As one of the biggest cannabis companies on the planet and one of North America's biggest craft beer and alcohol companies, it's easy to assume that the world is Tilray Brands' (TLRY 1.71%) oyster. But, in practice it's a business with finite resources and a mix of headwinds and tailwinds, just like most others.
Nonetheless, at the moment the balance of risk and reward appears to be tilting in Tilray's favor. So if you're considering an investment, here are two bullish signs to pay attention to, and one risk that could grow larger over time.
Alcohol sales are strong, and they might stay strong
Perhaps the largest bullish sign for Tilray is that its ambitious foray into the alcohol market in the U.S. appears to be gaining traction quite quickly. In its fiscal Q2, ended Nov. 30, it reported $47 million in booze sales, up 117% from a year before. To accomplish that feat, it expanded the distribution of the beers made by its subsidiaries, Mountauk Brewing and SweetWater Brewing, to reach more locations in the U.S. as well as in several Caribbean markets.
It also appears to be making products that consumers actually enjoy, which is a key component to developing a competitive advantage in branding over the long term. Its subsidiary Breckenridge Distillery won a slew of awards for its whiskeys in 2023, including high accolades at the New York International Spirits Competition. Importantly, making inroads into the alcohol markets with good products is already yielding beneficial financial results. When excluding the detrimental and likely short-term impact of beer brands acquired recently, its adjusted gross margin hit 55% in Q2, up from 47% a year before. As the recently purchased brands mature, Tilray could soon enough start to throw off excess cash, which would be a big point in its favor.
Cannabis market share in Canada is recovering, and without breaking the bank
Tilray was originally a pure-play marijuana company, built on its leadership in Canada's recreational pot market. But that leadership has been in question for a couple of years as a result of the market's shakeout. As many of its competitors learned, the challenge of the shakeout was to retain customers and a steady base of revenue as the marijuana market struggled with a supply glut. Without some kind of competitive advantage in branding or low-cost operations, many players withered, and some went under.
In late 2021, Tilray claimed it had a market share of 16%, with a goal of reaching 30% by 2024. But in its second quarter of fiscal 2024, the business reported a 12.5% share of the Canadian market, so that hasn't happened. The good news is that its share has recovered significantly from a year ago, when it controlled only 8.3%.
Tilray's cannabis margins are still under pressure, declining year over year, and the company is still unprofitable. But its marijuana sales rose by 35%, reaching $67 million in Q2, which indicates that it will likely continue to regain its market share losses. What's more, its total quarterly expenses of $228.5 million were little changed from a year ago. That's an incredibly bullish sign, too, because it means that it's keeping spending under control while rolling up its key markets once more.
One emerging risk: The U.S. cannabis market might be saturated by the time Tilray enters
Despite these two bullish signs, there are still major risks for Tilray ahead. Its long-deferred plans to enter the U.S. marijuana market, contingent on federal cannabis legalization, are still stalled. As it's demonstrating that it can continue to grow via alcohol sales and competition in the challenging Canadian cannabis market, investors shouldn't be worrying all that much about it missing out on big growth opportunities. The risk is that by the time it actually arrives in the U.S. market, which may be years from now, there may not be any low-hanging fruit left to pick in terms of securing market share.
In Canada, the years after cannabis legalization were a gold rush wherein domestic cannabis companies grabbed as much market share as they could possibly afford by producing vast amounts of legal marijuana. Then, the excess supply drove prices down, taking producer profit margins with them. The difference with the U.S. market is that there are already a plethora of state-level marijuana markets getting saturated with competition.
If Tilray showed up in the U.S. in a year or two if marijuana were legalized, it might have a very hard time elbowing its way into markets without having the benefit of having established brands. In that case, it may well would lose a lot of money.
