Is Tilray the Best Value Play in the $7.4 Billion Cannabis Beverage Market?

Although cannabis stocks have not performed well over the past five years, there is still some hope left for the industry. According to some projections, the market will continue to expand in the coming years, especially in North America. And it isn't just the demand for dried cannabis flower that will grow. For instance, the market for cannabis-infused beverages might be worth about $7.4 billion this year and could grow to $242.68 billion by 2034, representing a compound annual growth rate of 54.62%.

Tilray Brands (NASDAQ: TLRY) has been a leader in the cannabis market for a while, and it remains so. Is this pot grower the best value stock to buy to capitalize on this expanding opportunity?

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Why Tilray Brands might be a great pick

Tilray has one of the leading market shares in Canada, where recreational use of marijuana -- including cannabis infused drinks -- are legal. The company expanded its business significantly and now has a large beverage segment, which typically accounts for between 20% and 30% of its quarterly revenue. It isn't just in Canada either. Tilray established itself as a leading craft brewer (specifically, the fourth-largest) in the U.S. market through acquisitions.

That means the company has a network of brands and an established commercial footprint that put it in a strong position to profit from the growing demand for cannabis-infused beverages. True, there are some potential roadblocks. Most notably, marijuana remains illegal at the federal level in the U.S. However, if that were to change in the next eight years, Tilray could be one of the major beneficiaries. Meanwhile, the company's shares are trading at just under $6 apiece. And the company's forward price-to-sales of 0.7 (anything under 2 is usually considered "good") suggests it might be deeply undervalued.

Reasons to be skeptical

Tilray's shares look cheap for a reason: The company's financial results in recent years have been terrible. It has posted inconsistent revenue growth and consistent net losses.

TLRY Revenue (Quarterly) data by YCharts

It isn't all Tilray's fault. The cannabis market has faced regulatory challenges along with stiff competition that has led to oversupply issues. Even if it isn't Tilray's fault, the fact is that the company's results inspire little confidence. Can the pot grower bounce back? Consider the possibility that cannabis will become legal at the federal level in the U.S. Besides the fact that no one can predict that for sure, it isn't even obvious that it would solve Tilray's problems. After all, the company hasn't performed well despite pot being legal in Canada.

True, the U.S. would present a much larger opportunity than the Canadian market. But the reality on the ground is that legalization would open new avenues for growth, along with new problems. For example, Tilray Brands might have a lead on its peers in the beverage category. However, it wouldn't be that difficult for beverage giants to enter the market for cannabis-infused drinks if marijuana becomes legal at the federal level.

Dealing with competition from cash-rich corporations with well-known brands and deep experience in highly regulated consumer goods niches might not go too well for Tilray. The company might emerge victorious regardless, perhaps by partnering with such a beverage maker. But it's hard to predict that.

Is Tilray Stock a buy?

Tilray faces a challenging, highly competitive market with significant regulatory scrutiny. Further, the industry's prospects remain uncertain. There has been some regulatory progress in the U.S. over the past year -- authorities in the country have officially made marijuana a Schedule III substance, which changes things for the better for corporations in the sector -- but there remain plenty of risks.

Finally, even if Tilray's best-case scenario unfolds and marijuana becomes legal at the federal level in the U.S., the company might still fail to turn things around. In short, Tilray isn't a stock worth considering right now, for value investors and others. It's best to look elsewhere.

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.