Tilray Brands (NASDAQ:TLRY) is the top marijuana producer in Canada and has set its sights on growing its presence in the U.S. and internationally. With all those growth opportunities, it expects to generate $4 billion in annual revenue by fiscal 2024. That’s a big jump from today, where it’s at an annual run rate of around $620 million.
That forecast comes with an asterisk, however, and it depends on what happens with the U.S. pot market. Tilray needs it to be legal. And on the company’s most recent earnings call, CEO Irwin Simon didn’t sound too optimistic it will happen soon.
“I do not see legalization happening in the U.S. for at least the next two years”
Towards the end of the company’s earnings call, Simon expressed doubt that the U.S. will legalize marijuana and that it could be well into 2024 before it might happen. If that’s the case, then it would be difficult, if not impossible, for Tilray to hit its growth target.
Earlier on the call, Simon stated just that: “I’ve come out and said, $4 billion it’s contingent upon legalization in the U.S.” It’s surprising for both statements to happen on the same earnings call, effectively giving the company a way to already excuse itself for not hitting its overly ambitious goal.
What does this mean for investors?
Ultimately, investors shouldn’t take too much stock in what cannabis CEOs say about legalization in the U.S. A year ago, Canopy Growth CEO David Klein predicted that his company would be operating in the U.S. within the next 12 months.
Fresh off the news that the Democrats gained control of both the House and Senate, it was understandable that there was optimism in the industry. But the reality is that even passing a bill just to allow cannabis companies easy access to banking has been excruciatingly difficult. Nothing, unfortunately, has happened in the past year to suggest legalization is anywhere near a reality.
For investors, it’s ultimately the same situation as it was a year ago. While Tilray has made an aggressive projection of where it hopes to be in a few years, its CEO likely has no more insight into the prospects of U.S. legalization than Klein does.
If legalization takes place, Tilray and other Canadian pot stocks will likely soar on the hype. And if nothing happens, they could continue to falter. In the past 12 months, Tilray’s stock has crashed 60%, while the broader Horizons Marijuana Life Sciences ETF hasn’t fared much better, falling by 46%. The only positive is that with a price-to-sales multiple of less than four, Tilray’s a much cheaper buy. By comparison, Canopy Growth stock trades at more than six times its revenue.
Should you buy Tilray stock, anyway?
Tilray could be in an excellent position to penetrate the U.S. market, given that last year, it acquired convertible notes in multi-state operator MedMen Enterprises. This could potentially lead to owning the business in the future. The only question is, how long it will take for that to happen?
Legalization could very well take years, and it may end up depending on who is in the White House and how in favor of marijuana legalization they are. (Biden doesn’t appear to be eager to legalize it at all, and last year, White House staff were dismissed due to prior marijuana use).
If Tilray will have to rely on expanding its presence in existing markets with no hope of entering the U.S. anytime soon, its bullish forecast will likely fall short and go down in infamy, along with the bullish revenue forecast Canopy Growth gave in 2019. At that time, Canopy projected that annual sales for the coming fiscal year would top $1 billion Canadian dollars.
My suggestion to Tilray investors is the same as it is for those who want to buy Canopy Growth: Unless you’re investing for the long haul (e.g., more than just a few years), you may be better off looking at other growth stocks to invest in.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.