Prediction: Tilray Brands won’t be a cannabis company in 5 years

Almost four years ago, Tilray Brands (NASDAQ:TLRY) announced it would merge 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 could become the best cannabis stock to own.

But since this announcement in December 2020, the stock has fallen more than 85%. There was a lot of hype around this news, and the stock skyrocketed shortly after, but the enthusiasm died down – significantly.

Over the next five years, I expect Tilray to continue to grow its business, but this time moving away from cannabis. It may still only be a small part of its business, but I predict Tilray won’t be known as a marijuana company for a long time.

Tilray has already diversified away from cannabis

For years, although Tilray has been patiently optimistic that the United States would legalize marijuana, which would create a huge growth opportunity for the Canada-based company, it has expanded its business in other ways . It expanded into international cannabis markets and acquired alcohol brands.

Last month, the company reported its first quarter results for fiscal 2025. For the period ending August 31, its sales increased 13% year over year to $200 million. But of that total, less than a third (31%) of sales actually came from its cannabis operations.

The company generates more money from the distribution of pharmaceutical products abroad (34%) than from what it is best 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 specialized in alcohol than it currently is. Tilray completed the acquisition of Atwater Brewery in September, a brand 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 if the company continues to move further into the alcohol business, as that could be its best growth opportunity in the years to come.

Recent election results could increase the need for diversification

The strategy of waiting for the United States to legalize marijuana is not paying off for Canadian cannabis companies. And the recent U.S. election results may only exacerbate the need for the company to become even less reliant on cannabis in the future.

Republicans will control the House and Senate for at least the next few years. And historically, the party has taken a tough stance on drugs, making the prospects for outright legalization in the near future seem bleak. Investors should remember that even in more ideal circumstances in 2021, when Democrats were in control, there were no significant laws for the marijuana industry to pass.

The problem, however, is that many cannabis-related businesses and investors have tied their hopes to the prospects of legalization and the opportunities that would open up. It is a strategy that has failed miserably.

For Tilray, this only increases the need to further diversify outside of cannabis. There are international markets it could exploit, but this is a costly strategy that, again, relies heavily on legalization in not one but multiple countries. For the company to grow and move closer to profitability (it suffered a net loss of $35 million last quarter), focus on the alcohol and beverage sector – where it generates the gross profit margins the highest – would be the ideal strategy at this stage. .

This is why I think this is the path Tilray will follow. Cannabis may still be part of its operations, but my guess is that as there is a greater need for strong cash flow and profitable operations, it will also divest some or most of its cannabis operations to 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. It then does not have to worry about legalization and can take advantage of economies of scale in the United States, which can improve its prospects for long-term sustainable profitability.

Tilray, however, remains a very risky stock to buy today due to its continued exposure to cannabis and unprofitable operations. Investors are probably better off taking a wait-and-see approach, as Tilray still has a long way to go to prove 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.