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1 New Reason to Consider Buying Tilray Brands Stock and 1 New Reason to Sell

Now there is a silver lining to the latest setback.

Just when things seemed to be looking up, Tilray Brands (TLRY) shareholders received an unpleasant but not entirely unexpected shock: one of its portfolio companies dedicated to the sale of medicinal marijuana in the United States no longer exists, after having experienced a long period of decline.

But all is not lost and, despite its struggles, Tilray stock could still be decent long-term value under the right conditions. So let’s take a closer look at what happened and why there is also new hope for the future.

The bad news

Tilray’s home market is in Canada, where it sells both cannabis and alcohol, but it also competes in the U.S. craft beer industry as well as the medicinal cannabis industries in a handful of EU countries.

One of the most obvious goals of many Canadian marijuana companies is to gain exposure to the American cannabis market. But since cannabis is not yet federally legal in the United States, aspiring competitors can choose to either try to enter permissive state markets before federal legalization, or wait for laws to change and then to enter as many states as they wish. prefer. Tilray chose the second option, even though it laid the groundwork for faster market access after legalization than would be possible from a cold start.

In short, in 2021, it invested in the repurchase of the majority of the convertible debt of Doctors, a medicinal marijuana chain with operations in a few states, for $165.8 million. The idea was to exercise the right to convert this debt into equity, granting majority ownership immediately upon legalization, thereby facilitating rapid entry into the US market. MedMen stores, home to throngs of already loyal customers, would become convenient distribution points for Tilray’s myriad marijuana brands.

Unfortunately, there was a small problem.

MedMen declared bankruptcy at the end of April. Its original CEO and board resigned, with the CEO leaving in January and the board around the time of the bankruptcy filing. There are about $410 million in outstanding claims from creditors on its meager remaining assets.

There is simply no way for Tilray to move forward with their plans to compete in the US cannabis market as they had originally envisioned.

The good news

As unfortunate as MedMen’s crash and fire is, the upside is that Tilray management is already taking aggressive steps to implement a new U.S. entry plan.

On May 22, the company announced it would launch an IPO stock sale program to raise up to $250 million in cash. This money must be specifically earmarked for the acquisition of marijuana-related businesses or assets in the United States and must explicitly not be used to cover operational expenses.

As of the third quarter of its fiscal year, Tilray had $226 million in cash, equivalents and marketable securities. Therefore, if it issues and sells as many shares as allowed, it could have a decent war chest for expansion.

Additionally, this time around the regulatory catalyst for market entry will not be full legalization. The effective date for the reclassification of marijuana in the United States from Schedule I to Schedule III, which is currently underway, is the new playing time goal. It is unclear when the process will be completed, but it will probably be within the next 12 months.

Shareholders will rightly complain that the value of their shares will be diluted once new shares are sold. Still, the quick move to a new plan is undoubtedly good news, and the company likely has enough cash to make things work. The much more tangible time goal will also help prevent the plan from languishing until it withers, as was the case with MedMen, since the march toward full legalization took much longer than it did. that many industry experts believed.

This title is a risky game

Tilray now has a realistic approach to entering the US market. This means that it will likely experience strong revenue growth whenever it actually enters the market. In other words, its status as the world’s largest cannabis company by revenue is probably assured for now.

At the same time, it is still very far from achieving profitability on an operational basis, and the latest plan certainly goes even further. Its trailing 12 month (TTM) operating losses were $121.3 million. At some point, this company will have to prove to the market that it can produce more money for investors than it burns.

Until then, this is not the right choice unless your risk tolerance is very high and you desperately want exposure to the marijuana industry.