Tilray Brands’ Potential Reverse Stock Split Raises Investor Concerns
Many investors link stock splits to strong company performance. Generally, businesses tend to initiate splits as a result of rising share prices following positive market outcomes. In contrast, companies struggling in the market may be compelled to perform stock splits to manage share prices. A prime example is Tilray Brands (NASDAQ: TLRY), a player in the cannabis industry.
Types of Stock Splits
Companies can execute two main types of stock splits. A forward stock split occurs when multiple new shares are given to investors for each share they own. This type often draws positive reactions from analysts and investors, as it signals management’s confidence in future performance. It also lowers the share price, making stocks more accessible to average investors.
Conversely, a reverse stock split consolidates shares, raising the price proportionately. This action has its justification, primarily for companies at risk of being delisted.
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Tilray has faced challenges over the past five years, paralleling the struggles in the cannabis sector. Earlier this year, the company’s share price fell below $1, currently hovering around $0.43. This volatility is expected to persist, with downward trends likely. Two main issues contribute to this forecast. First, Tilray’s financial performance has been lackluster, with revenue growth largely attributed to acquisitions while the company consistently reports losses.
TLRY Revenue (Annual) data by YCharts
Second, the legal landscape poses notable challenges for cannabis growers. Although recreational cannabis has been legal for adults in Canada since 2018, regulatory hurdles, including a slow retail licensing process, hinder progress. This is compounded by federal illegality in the U.S., raising doubts about how much Tilray might gain from potential legal advancements. The Canadian experience showed that legalization alone does not guarantee success for cannabis firms.
In light of these conditions, Tilray announced on April 17 that it would hold a special stockholder meeting in June to vote on a reverse stock split proposal. Given the current state of the company, approval seems likely.
Implications for Investors
If Tilray proceeds with the reverse split, it will avoid delisting from the Nasdaq. However, such a move does not address fundamental business issues. Investors may wonder if there is hope for Tilray. The company has lessened its focus on cannabis, positioning itself as a leading craft brewer in the U.S. Furthermore, it anticipates that the federal legalization of cannabis will occur, which Chief Executive Officer Irwin Simon has predicted might happen during President Donald Trump’s second term.
Should legalization occur, Tilray could potentially dominate the market for cannabis-infused beverages due to its established presence in craft brewing. Nevertheless, uncertainties remain. The timeline for legal recreational use within the next four years is unclear, and even with legalization, the specifics could restrict market opportunities.
Despite efforts with its craft brewing division, Tilray has not yet successfully reverted its fortunes. Given these factors, the company may not be appealing to investors.
Is Tilray Brands a Worthwhile Investment?
Before considering an investment in Tilray Brands, it is important to weigh the following:
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
The views expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
