It was almost four years ago that Tilray Brands (NASDAQ: TLRY) announced that it would be merging with low-cost cannabis producer Aphria to create a larger, more dynamic, and global marijuana company. At the time, it was an exciting prospect for investors, creating what might end up becoming the best cannabis stock to own.
But since that announcement back in December 2020, the stock has declined by more than 85%. There was a lot of hype around the news, and the stock skyrocketed shortly afterwards, but the enthusiasm would fade -- significantly.
Over the next five years, I expect Tilray to continue to evolve its business -- but this time, away from cannabis. It might still be a small part of its business, but I predict that Tilray won't be known as a marijuana company for much longer.
Tilray has already been diversifying away from cannabis
For years, while Tilray has been patiently optimistic that the U.S. might legalize marijuana, which would result in a huge new growth opportunity for the Canadian-based company, it has been expanding its operations in other ways. It has expanded into international cannabis markets and has acquired alcohol brands.
Last month, the company reported its first-quarter earnings of fiscal 2025. For the period ending Aug. 31, its sales grew by 13% year over year to $200 million. But of that total, less than one-third (31%) of sales actually came from its cannabis operations.
The company generates more money from distributing pharmaceuticals overseas (34%) than it does from what it's most known for: cannabis. And even its alcohol business now accounts for 28% of revenue, with wellness being its smallest segment, contributing 7% of total sales.
In the future, the company could become even more of an alcohol business than it is now. Tilray completed its acquisition of Atwater Brewery in September, a brand that it acquired from Molson Coors. It has more than a dozen beverage brands in its portfolio, including SweetWater Brewing and Breckenridge Brewery, which investors may be most familiar with. And it wouldn't be surprising for the company to continue to go deeper into alcohol because that may be its best growth opportunity in the years ahead.
Recent election results could increase the need for diversification
The strategy of waiting for the U.S. to legalize marijuana isn't paying off for Canadian cannabis companies. And the recent election results in the U.S. may only exacerbate the need for the company to become even less dependent on cannabis in the future.
Republicans will be in control of the House and Senate for the new few years, at least. And historically, the party has taken a hard stance on drugs, making the prospects of outright legalization in the near future appear dim. Investors should remember that even under more ideal circumstances in 2021 when the Democrats had control, there was no significant piece of legislation to pass for the marijuana industry.
The problem, however, is that many cannabis businesses and investors have tied their hopes to the prospects for legalization and the opportunities that would open up. It's a strategy that has failed miserably.
For Tilray, it only increases the need to diversify further away from cannabis. There are international markets it could pursue, but that's a costly strategy that again depends heavily on legalization across not just one but multiple countries. For the company to grow and get closer to profitability (it incurred a net loss of $35 million last quarter), focusing on the alcohol and beverage business -- where it generates the highest gross profit margins -- would be the ideal strategy at this point.
That's why I believe it's the path Tilray will pursue. Cannabis may still be a part of its operations but I suspect as there's a greater need for strong cash flow and profitable operations, it will also divest of some or most of its cannabis operations in Canada (where competition is fierce) and in international markets.
Should you invest in Tilray stock today?
As Tilray diversifies further into alcohol, I believe it will become a safer investment option. Then it doesn't have to worry about legalization and can take advantage of economies of scale in the U.S. which can improve its prospects for sustainable, long-term profitability.
Tilray, however, remains a highly risky stock to buy today because of its ongoing exposure to cannabis and its unprofitable operations. Investors are likely better off taking a wait-and-see approach as Tilray still has a long way to go in proving that it can be a good growth stock.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
