What a Hemp Crackdown in the U.S. Could Mean for Tilray's Growth Opportunities

TLRY -21.07%

Key Points

• Selling hemp-based products has been a way for Canadian cannabis companies to enter the U.S. market.

• The U.S. government, however, is closing loopholes, which will effectively ban nearly all of those products in a year.

• Tilray Brands considers itself a leader in the hemp industry.

• 10 stocks we like better than Tilray Brands ›

The U.S. government is looking to crack down on hemp products. Congress recently passed a bill that industry experts say will effectively ban most hemp-derived products. It was then signed into law. The industry is bracing for layoffs and significant challenges ahead.

That could be a particularly troublesome development for cannabis companies that have looked to hemp as a way to penetrate the U.S. market. Back in 2018, the passing of the Farm Bill opened up some opportunities (and loopholes) for cannabis companies to grow their operations without running afoul of the U.S. ban on marijuana.

Tilray Brands (NASDAQ: TLRY) is one Canadian-based cannabis company that was eyeing opportunities related to hemp. This recent development, however, puts that under a cloud of uncertainty. Here's a look at what that might mean for the business.

Hemp was a key part of Tilray's expansion efforts

In recent years, Tilray has been expanding through acquisitions, specifically, in alcohol. It has been adding multiple breweries in the U.S. to its portfolio, becoming one of the largest craft brewers in the process. This is key in not only helping it expand into an area outside of cannabis, but also to help position it for growth with hemp-based beverages, which can give users a modest buzz.

The key legal difference between marijuana and hemp is in the psychoactive substance, tetrahydrocannabinol (THC). In hemp products, the percentage is low at 0.3% or less. That's not something marijuana users would often go to in search of a high because of the low THC content. However, offering hemp-based beverages is a bit of a novelty nonetheless, and it has provided Tilray with a way to expand its operations in the U.S. Last year, the company announced a beverage strategy that involved rolling out hemp-derived THC beverages to multiple U.S. markets.

Tilray recently issued a press release on news of the hemp crackdown, saying that it "condemns misguided prohibitionist measures." While it says that these types of products don't account for a material part of its business, it does nonetheless refer to itself as an industry leader in hemp. Thus, it's hard to overstate the importance of a potential crackdown because the hope was likely that hemp-derived products might one day be a more significant part of its operations.

Tilray has been struggling to generate strong and consistent growth in recent years

A big problem for Tilray and many cannabis producers these days is that the Canadian cannabis market is highly competitive and margins are extremely tight. Meanwhile, international cannabis markets are small and come with complexity, with differing restrictions from one country to another. And so it's little surprise that when there's talk of marijuana reform or legalization in the U.S., shares of Tilray Brands and other cannabis companies take off.

Tilray has struggled with growth, and while the above chart may suggest it hasn't been doing all that bad, that big bump was largely due to acquisitions. Organically, it's been a far different story for Tilray, and its lackluster results have made it one of the reasons investors have dumped the stock -- it's down 86% over the past five years.

Is Tilray's stock headed lower?

The market for hemp-based THC products could effectively evaporate in a year if new rules aren't passed before the restrictions go into place. That's bad news for Tilray and many other cannabis companies. However, even with hemp, I don't think Tilray's growth opportunities looked all that promising. Hemp isn't a huge market, and even Tilray's own management admits it hasn't been material to its business thus far. There's no assurance that would have changed in the future, either.

Tilray's stock has been in a tailspin of late, down around 37% in just the past month as of Nov. 21, falling back to less than $1. Ultimately, there's still a lot of risk with Tilray, and potentially losing one of its limited growth opportunities could make things go from bad to worse for the troubled cannabis stock.

Although it's down heavily of late, you may want to resist buying the stock on the dip as Tilray faces an uncertain road ahead. And with a lack of profitability and limited growth potential, there just isn't a terribly enticing reason to take a chance on it today.

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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.

What a Hemp Crackdown in the U.S. Could Mean for Tilray's Growth Opportunities was originally published by The Motley Fool