Here's Why I Wouldn't Touch Tilray With a 10‑Foot Pole

Tilray Brands (NASDAQ: TLRY) is focused on expanding its reach. The marijuana company has now branched out to include CBD products and alcohol, and has started to call itself "a global lifestyle and consumer packaged goods company." It's not a bad idea, given the headwinds in the marijuana space, but there are material risks to consider here.

The marijuana market hasn't panned out as hoped

The first big problem with Tilray Brands isn't actually specific to the company. It is a problem that the entire marijuana sector faces. Wall Street had huge expectations for marijuana sales as more and more localities legalized the use of the drug. Marijuana sales did rise, but competition in the newly developing industry was fierce, so profitability hasn't been a hallmark of the industry.

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Helping that along was the fact that illicit drug sales haven't suddenly stopped. So not only are legal marijuana sellers competing against each other, but they still have to contend with illegal drugs that are often cheaper. Not having to pay taxes or operate regulated growing and processing facilities will always give illegal drug sellers an edge.

All in, Tilray's core business isn't as exciting as Wall Street once hoped it would be. This is why the company has branched out into new areas. That move makes sense, and CBD and alcoholic beverages are logically adjacent business lines, so that's not an issue.

The share count is on the rise

My concern is the rapid pace of the company's shift. Since 2021, it has acquired 19 brands. That's a lot to digest in a short amount of time. Mistakes get made with such rapid investment, noting that the company has already taken write-downs across every business line.

Those write-downs have a very real cost for shareholders, even if they are noncash charges. That's because the acquisition spree has been funded with stock sales. The company's share count has increased by more than 300% since the start of 2021. That not only dilutes current shareholders, but it also means that all of the write-offs have squarely landed on shareholders' shoulders.

Is Tilray focused on empire building?

Tilray Brands appears to be pursuing a diversification strategy. That makes sense, but the ongoing share issuances show that the plan has a cost. And the write-offs are a potential warning sign that management is so focused on buying brands that it may be making mistakes. Companies that go on acquisition sprees sometimes go too far. I wouldn't touch Tilray until there's proof that the diversification plan has led to sustainable profits.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.