Some investors associate stock splits with a company performing well, and there’s a reason for that. Companies often split their stock after their share prices have become expensive due to market-beating performances. However, companies significantly lagging behind the market can be forced to conduct stock splits. Tilray Brands (TLRY 2.34%), a cannabis company, is a good example.
The two kinds of stock splits
When companies issue multiple new shares for each share that an investor owns, it’s called a forward stock split. That’s the kind that often attracts positive attention from investors and analysts. It can be a sign that management expects the business to perform well for a while. It can also make the shares less expensive, making them more affordable for average investors. There is another kind that’s called a reverse stock split. That’s when a company reduces the number of shares and increases its stock price proportionately. There is (at least) one good reason to perform a reverse stock split.
Companies listed on major stock exchanges like the Nasdaq must maintain a share price above $1. If they fall below that and stay there long enough, they will be delisted, which can lead to various issues. Major stock exchanges have significant advantages that smaller ones don’t.
Image source: Getty Images.
That brings us to Tilray, which has struggled during the past five years, along with the rest of the cannabis industry. The company’s share price fell below $1 earlier this year. It currently stands at about $0.43. It will remain volatile. It has been for a long time, but there is a good chance it will maintain its general southbound trend. Here are two reasons why. First, Tilray’s financial results remain unimpressive, to say the least. Much of its revenue growth in recent years has been due to acquisitions, while it is consistently unprofitable.
TLRY Revenue (Annual) data by YCharts
Second, the legal landscape remains challenging for pot growers. In the U.S., it is still illegal at the federal level. In Canada, although recreational uses of cannabis have been legal for adults since 2018, there have been significant regulatory barriers limiting the progress of cannabis companies, including a slow retail licensing process. Third, even if some legal progress is forthcoming, it’s unclear how much Tilray will benefit from that. As the Canadian experience taught us, legalization is no guarantee of success for pot growers.
So, Tilray’s share price could continue falling, which makes it unsurprising that on April 17, it announced it would have a special stockholders’ meeting in June to put a reverse stock split proposal to a vote. Given the company’s condition, there is an excellent chance it will be approved.
What it means for investors
Tilray won’t be delisted from the Nasdaq if it goes forward with its proposed reverse split, but that does nothing to improve the company’s business. Is there any hope for the pot grower? Tilray has decreased its exposure to its cannabis business in recent years. It is now a leading craft brewer in the U.S. Further, the company continues to hope that cannabis will be legalized at the federal level in the U.S.
Chief Executive Officer Irwin Simon predicted that it would happen during President Donald Trump’s second term. If it does, the company will be in a good position to dominate the market for cannabis-infused drinks thanks to its significant footprint in the craft brewing industry, or so the argument goes. While that sounds exciting, there are too many unknowns. First, we don’t know that recreational use of cannabis will become legal within the next four years. Second, even if it does, the precise details of legalization could significantly limit the market’s potential.
Meanwhile, Tilray’s craft brewing business hasn’t yet been enough to get it back on track. Tilray doesn’t look like an attractive company for all those reasons. Investors should steer clear of it.
