There is rising optimism that the U.S. government may soon enact marijuana reform, which could lead to eventual legalization down the road. If or when legalization will happen is still anyone’s guess, but with the government looking to reschedule cannabis from a Schedule I substance down to a less serious Schedule III substance in the near future, investors and analysts alike are optimistic that it may be a step in the right direction.
One company that is particularly bullish on these developments is Tilray Brands (NASDAQ: TLRY). While it can’t enter the U.S. market without jeopardizing its position on the Nasdaq today, it is hopeful that may change in the future.
Acquisitions have played a key part of its strategy in the past, and Tilray made a recent move that could pave the way for yet another deal to be in the works in the future. This time, it could be an acquisition related to its long-term growth prospects in the U.S. pot market.
Tilray announces an offering worth $250 million
On May 17, Tilray announced that it filed a prospectus supplement and that it plans to raise up to $250 million through an at-the-market offering. A stock offering itself isn’t terribly surprising, especially for a business such as Tilray, which isn’t profitable and may need cash to keep its operations growing. In the trailing 12 months, it has incurred a net loss of just under $352 million. But what stands out is the reason for the offering and what Tilray plans to do with the money.
Tilray says that it is going to use the proceeds of the offering “to fund strategic and accretive acquisitions or investments in businesses, including potential acquisitions of assets in the U.S. and internationally in order to capitalize on expected regulatory advancements or expansion opportunities.”
While companies often use vague language in offerings to suggest that money may be used for general corporate purposes, Tilray went so far as to explicitly say it doesn’t expect to use it for those reasons. The cash it raises from this offering appears to be primarily to fund acquisitions.
An acquisition involving a U.S. company may not be imminent
Valuations in the cannabis industry have been falling in recent years, and that $250 million could go a lot further than in years past. Since 2021, the AdvisorShares Pure US Cannabis ETF has lost nearly 80% of its value. There is the potential for Tilray to find some good acquisitions out there, regardless of which market it looks to for a deal.
The problem, however, is that even if Tilray finds a suitable business to acquire, it may still not be able to close the acquisition until a later date. Due to the federal ban on marijuana in the U.S., Tilray couldn’t technically acquire a company without running afoul of the Nasdaq. Even if marijuana is rescheduled as a less dangerous substance, it won’t change the ban on it. And while Tilray could use some complicated maneuvering, such as rival Canopy Growth, to set up another entity and house any U.S. assets in there, it hasn’t shown any interest in pursuing such a complex structure in its operations at this point.
The company could invest in other U.S. companies that aren’t directly involved in cannabis plant-touching operations. But any deal for an actual marijuana producer would likely remain pending, potentially for years, until marijuana becomes legal federally in the U.S. — and there’s no guarantee as to when (or if) that might happen.
Tilray investors shouldn’t set their expectations too high
Tilray seeking acquisitions isn’t anything new for the company. It already hinted earlier this year that it’ll be in acquisition mode to help grow its operations. But investors shouldn’t forget that this company has also found some pretty risky partners in the past. Last year it acquired Hexo, a struggling Canadian marijuana producer, and it was optimistic for the potential to acquire MedMen Enterprises, a multi-state marijuana operator that recently filed for bankruptcy and is essentially worthless today.
Whether a deal happens or not, investors shouldn’t buy the stock on this news. Legalization in the U.S. may still be years away from being a reality, and simply pursuing more acquisitions could result in more share dilution and a lower stock price. Until the company actually shows that it’s on a realistic path to profitability, investors may be better off avoiding Tilray Brands.
Should you invest $1,000 in Tilray Brands right now?
Before you buy stock in Tilray Brands, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Tilray Brands wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $703,539!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 28, 2024
David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq and Tilray Brands. The Motley Fool has a disclosure policy.
Is Tilray Brands Preparing for a Big U.S.-Based Acquisition? was originally published by The Motley Fool
Signup bonus from
