Facing Facts: Tilray’s Diversification Dilemma Spells Risk for TLRY Stock Investors

Stocks to sell

I recently included Tilray (NASDAQ:TLRY) stock in a list of three cannabis stocks to buy now. My rationale for recommending investors buy was I thought it could be successful in its diversification plan beyond cannabis with beer and spirits. However, I cautioned that investing in all three stocks came with above-average risk, Tilray probably the riskiest of the bunch.

Now, I’m going to argue the bearish position on TLRY stock, which probably makes me look like a hypocrite, but investing in any company is always a case of weighing the good with the bad. Clearly, I feel CEO Irwin Simon’s diversification plan isn’t the worst idea in the world, but that doesn’t mean I can’t poke holes in its business or that there aren’t better stocks to own for the next 20 years.

There Are Better Buys Than TLRY Stock

The beautiful thing about investing in U.S.-listed stocks is that there are so many choices. Not as many as there once was, mind you. According to the St. Louis Fed, there were 30.03 listed companies per million people in the U.S. in 1990 (a record) compared to 12.99 in 2019, but it still works out to nearly 6,000 companies on the Nasdaq and NYSE.    

So, unless you truly believe that Tilray is the second coming, logic dictates that it really doesn’t make sense to put money into the company unless it’s a very small portion of your total portfolio. Think of it this way: if you were an ETF or index, would you weight TLRY at more than 0.05%? Unlikely. 

Unless, of course, you’re an ETF. And a cannabis ETF at that. 

Tilray currently is the fourth-largest holding in the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) at 5.87%. The three ahead of it are the ETFMG U.S. Alternative Harvest ETF (NYSEARCA:MJUS) at 51.25%, Cronos Group (NASDAQ:CRON) at 8.05%, and SNDL (NASDAQ:SNDL) at 7.37%. 

Each of those three, especially MJ, would be smart alternatives to Tilray if you’re betting on the cannabis industry rebounding in the future. SNDL, ironically, has also diversified its products beyond cannabis with the acquisition of Canada’s largest privately owned liquor store chain.  

I’m a big believer that you’ve always got choices. 

Diversification Doesn’t Mean Greater Profitability

My InvestorPlace colleague, Alex Sirois, recently pointed out the shortfall in Tilray’s diversification moves. He believes that the company’s moves to diversify beyond cannabis have helped revenues at the expense of gross profits. 

But what’s more interesting about Sirois’s comments is that he illustrates the difficulties of scaling a business. In 202o, he reminds readers, Tilray hit for the fences by acquiring and merging with Aphria, to create one of Canada’s largest cannabis companies, and the scale to compete worldwide. 

Only, it really hasn’t worked, because the scale acquired turned out to be overkill in an overproduced Canadian market. In June, MJBizDaily reported that Canada’s unsold cannabis inventory was a whopping 1.5 billion (yes, that’s billion with a b). 

The oversupply has led to lower prices, which in turn has led to greater losses, and plenty of bankruptcies across Canada.

“I don’t think there’s a lack of competition in Canada – I think there’s overcompetition,” Elad Barak, CEO of Djot, a Toronto-based company selling cannabis dispensers and pod systems for concentrates told MJBiz Daily in June. “They’re growing cannabis because that’s what they know how to do. But when they go to sell it, they can’t,” he said.

Greater Market Share Means Little

Tilray continues to mention its leading market share in its quarterly reports. It mentioned the words “market share” eight times in its Q1 2024 report. 

What is the point of having the top market share in Canada when the industry is so heavily overproduced? It’s great to thump your chest and boast to investors but it does little to improve the profitability of cannabis and given the 1.5 billion gram unsold inventory, that’s not changing anytime soon.

In the same press release, it highlights the fact it is now the 5th-largest craft brewer in the U.S. Unfortunately, the craft beer industry isn’t faring too well right now. The Brewers Association reported that craft beer sales declined in the first half of 2023, the first time it’s reported a decline since it began reporting the numbers.

So, if I’m reading this right, scale has allowed it to gain control of two industries in decline, or at the very least, struggling to grow. 

I think my colleague would agree that market share doesn’t always translate to greater profitability. 

Just another reason investors have to be very careful about investing in Tilray. The risk is immense. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.