Tilray Brands

Tilray's fiscal third-quarter 2026 net revenue increased 11% to USD 207 million. The 19% revenue growth in the cannabis segment and 35% growth in the distribution segment offset a 24% decline in the beverage segment. Adjusted EBITDA margin expanded about 32 basis points to 5.2%.

Why it matters: The decline in beverage sales is expected, given portfolio rationalization and ongoing challenges in craft beer. However, it does otherwise cloud strong growth in both the international and Canadian cannabis businesses. We're still skeptical of the strategic synergies between the two. Given the headwinds in craft beer, it's somewhat curious to see the company push further into that market with the acquisition of BrewDog and a partnership with Carlsberg. While these efforts can optimize Tilray's alcohol portfolio, it further exposes it to declining alcohol consumption. Moreover, further investment in alcohol dilutes investment exposure to the cannabis business, which has performed well. International revenue grew 73%, and Canadian revenue grew 8%. The latter is particularly impressive given many years of price compression.

The bottom line: As previously announced, we will discontinue coverage of no-moat Tilray on or about April 20. Based on the quarter's results, we would be unlikely to make any material changes to our USD 14/CAD 19.50 per share fair value estimates. Shares have declined roughly 33% over the past three months, leaving them undervalued, in our view. We think the market underestimates the growth runway for Tilray's cannabis business and overweights the challenges in the alcohol business. We reiterate our Very High Uncertainty Rating as cannabis is still a young and volatile industry, suggesting a wide range of potential valuation outcomes. Specifically, the timing of profit growth and regulatory progress is uncertain, with many factors outside of Tilray's control.

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After updating our model for fiscal 2026 second-quarter results, we've maintained our fair value estimate of $14 per share for Tilray.

Tilray's fiscal second-quarter 2026 net revenue increased 3% to USD 218 million. The 3% revenue growth in the cannabis segment and 26% growth in the distribution segment offset a 20% decline in the beverage segment. Adjusted EBITDA margin declined about 20 basis points to 4.1%. We forecast $851 million and 7.5% for the full year, respectively.

Longer term, we forecast CAGR for net revenue from cannabis to be 7% through fiscal 2035. Our forecast is based on low-single-digit annual price increases and higher volumes, mostly from international medical markets.

For Tilray's alcohol business, we forecast 3.1% annual revenue growth over the next decade, and long-term gross margins to remain steady in the mid-40% range, as contributions from lower-margin beer brands weigh on expansion.

We expect the company’s adjusted EBITDA margin to expand to 24% in fiscal 2035 from 7% in fiscal 2025. This is mostly due to fixed cost leverage against overhead expenses and wider gross margins, primarily from the cannabis business.

We forecast capital expenditures averaging 2.5% of net revenue through our 10-year forecast period. We assume a cost of equity of 9%, reflecting the medium cyclicality of revenue, our forecast 17% operating margin, and low operating and financial leverage.

Our fair value estimate does not include any specific ESG risk, as we do not see any with high enough probability for inclusion within our base case.

Captured within our uncertainty rating, as societal acceptance, usage, and legality continue to widen, we estimate cannabis faces a 25%-49% probability of seeing higher taxes. We estimate materiality of 25%-49%, as we see producers may struggle to pass on all higher taxes to the end-customer. This risk is offset by customers switching to the illicit market, preventing overly aggressive taxation in the legal market.

We also note five additional ESG risks. First, we see a potential ESG risk related to the environmental and social impact of the company’s products and services if the trend of widening societal and legal acceptance reverses. We see less than 10% probability of this occurring, but the impact could be in the 25%-49% range given the likely impact on legal sales.

Second, for carbon from owned operations, we see a risk of increased regulation for indoor production and its high electricity usage. Using lamps to provide artificial sunlight and cooling to offset the heat generated by the lamps, the carbon footprint of indoor production is sizable. However, we estimate just a 10%-24% probability of occurring and 10%-24% materiality, as any regulation or increased cost would likely shift production outdoors.

Third, for outdoor production, we see potential ESG risk around land use and biodiversity. Like all agricultural crops, there is a risk for damage to the natural environment they’re grown in, particularly if fertilizers, pesticides, or other chemicals are used. However, we see just a 10%-24% probability and less than 10% materiality. Furthermore, we don’t think increased environmental costs would be enough to erode the cost advantage of outdoor production.

The fourth and fifth ESG risks center around product governance for cannabis. First, manufacturing irregularities could potentially cause adverse consequences after consumption. We see less than 10% probability of this risk materializing, as regulations require significant testing before products make it to a dispensary shelf. Still, we estimate the risk to have 10%-24% materiality, as a crisis could drive slower growth and increased regulatory costs.

Finally, increased regulation on adverse health effects could lead to slower growth or higher costs. However, we see the probability as less than 10%. Health impacts are largely understood and accepted by consumers, at least anecdotally. We think scientific studies are more likely to disprove myths about cannabis’ dangers rather than find new health effects. Still, the risk is somewhat material at 10%-24% as it would likely hurt consumer usage.

We assign Tilray a Morningstar Economic moat Rating of none. We think the company’s four segments—cannabis, beverage alcohol, distribution, and wellness—lack durable competitive advantages individually and fail to create any combined advantages. Quantitatively, we forecast mid-single-digit returns on invested capital at the end of our 10-year forecast period, well below our estimate of its roughly 8% cost of capital.

Tilray’s cannabis business centers on Canadian cultivation that is then sold to domestic dispensaries or exported into the international medical market. Unlike US multistate operators, or MSOs, Canadian licensed producers are generally barred from verticalization via ownership in dispensaries. That limits Tilray’s exposure to cultivation, which we see as a structural challenge to moat formation.

Canadian cultivators are most akin to other consumer product companies. Within the consumer products sector, brand intangibles are a common source of moat. However, we do not think any Canadian cultivator will develop a brand strong enough to establish a durable competitive advantage. Regulations significantly restrict traditional advertising, which we believe makes it harder for any one brand to both stand out and remain top of mind with customers (especially outside of dispensaries’ physical and digital walls) to create affinity. Moreover, Canada’s stricter packaging rules, compared with the US, limit the products themselves from visibly standing out from the competition. Thus, we think it’s far more likely that a customer will purchase the brands available at any given dispensary than travel further to find a particular one.

We believe the most likely moat source for Canadian cultivators would be regulation intangibles. Licensed producers, or LPs, require government licenses to grow cannabis and potentially process it to value-added forms like vapes or edibles. In theory, limited licenses could give producers protection from new entrants. However, in Canada, there are far too many LPs for the level of demand in the legal market. This has led to oversupply and, in turn, price compression. This has not only eroded the potential for regulation intangibles to create an advantage, but also the possibility of a scale-based cost advantage. Amid excess capacity industrywide, LPs are incentivized to further compete on price to minimize the adverse effect of subscale operations.

Another potential moat source for cultivation would stem from a cost advantage. This is possible for producers that have cheap access to inputs (including potentially through scale purchasing) or through process (such as technology or scale). However, we don’t think either of these is likely for LPs. Cannabis is mostly cheaply produced through outdoor production, with geography the biggest determinant in quality and yields. But given Canada’s cold climate, indoor production is more common, which comes at a much higher cost, given the intense energy needs to power lights and climate (to offset the heat created by the lights). On the positive side, it gives cultivators the most control over the environment and potentially yields the highest quality at the lowest price. Still, we struggle to see a scenario in which any individual producer can create a durable cost advantage, as any technological advance could likely be mimicked, and scale is hard to come by in Canada.

Additionally, despite the expansion of the legal market, the illicit “black” market remains a sizable threat. Cannabis purchased in the legal market faces extensive purchase taxes, with Canadian flower and prerolls taxed at the greater of CAD 1 per gram or 10% of the wholesale price. The former rate has been largely applicable, which means that taxes have not scaled down with prices. In comparison, a customer purchasing a similar product will obviously pay no tax in the illicit market, creating a structural cost disadvantage for the legal industry. Moreover, the very existence of the legal market makes enforcement of the illicit trade more difficult, given the challenge of determining the source of any product.

International medical markets have been growing, with sizable markets like Germany looking to ease legality. LPs like Tilray have benefited as more markets open. Because exporters must pass strict production standards to qualify, supply has been more balanced and prices more favorable. However, we don’t expect current levels of profitability (unquantified due to a lack of disclosure but qualitatively described as being much higher) to persist. Countries that are expanding medical legalization are doing so for the benefit of their citizens. Thus, it would be in their best interest to qualify as much production as possible, leading to lower prices over time.

Unique among both LPs and MSOs, Tilray has grown a sizable alcohol business by acquiring Breckenridge Distillery in 2021 and several craft beer brands from Anheuser-Busch and Molson Coors in 2023 and 2024, respectively. Looking strictly at its alcohol portfolio, we see little evidence of a durable competitive advantage. Craft beer has been losing popularity over the last decade—a trend we do not expect to reverse. Moreover, while some brands carry higher prices, we think it’s evidence of higher priced input costs intended to create a better consumer experience compared with industry-leading beers, rather than a brand intangible. Additionally, we think a focus on craft beer inherently creates a barrier to a scale-based cost advantage. Its consumer appeal centers on local artisanship, so as a brand gets bigger and more commercial, it loses its craft perception.

We also don’t see synergy between cannabis (nearly all Canadian exposure) and alcohol (mostly American exposure). Not only is there a meaningful lack of geographic overlap, but the products and distribution systems are vastly different. We see little reason that strength in one industry can be translated into the other. The prospects of leveraging its alcohol footprint for hemp-derived delta-9 beverages is further threatened by the looming restriction on hemp-derived beverages set to take effect in November 2026.

Tilray’s distribution and wellness are far smaller contributors to companywide profits, but also lack competitive advantages. In distribution, Tilray owns CC Pharma, one of the largest drug importers in Germany, focused on pharmaceuticals. Distribution businesses generally sport thin profit margins, given the lack of a moat. Tilray is no different, with adjusted gross margins about a quarter to a third of its other segments. Moreover, it does not help Tilray’s international medical cannabis exports. Tilray’s wellness segment focuses on selling hemp-based food and other products in the US and Canada. Given such a niche focus, a lack of barriers to entry, and little evidence of the existence of a brand intangible, we think it’s unlikely a moat can form in this business.

Lastly, we’d highlight the Very High Morningstar Uncertainty Rating we have for cannabis producers we cover like Tilray, which highlights a significant threat of material value destruction that precludes us from assigning any moats in the industry. Given stubborn oversupply in Canada, we see value destruction through massive dilutive equity issuances as enough of a threat to prevent a moat.

Tilray's better financial health and profitability compared with Canadian peers positions it to lead its home market.

Tilray's management focuses on strategic SG&A spending and running a lean business model, benefiting its financial health in the early growth stage industry.

Neglected and underinvested in by their previous owners, Tilray's acquired craft alcohol brands can see growth accelerate with attention and investment, while also providing a launching pad for hemp-derived THC beverages.

The continued strength of the illicit market and legal market oversupply has led to price compression in Canada.

Governments are incentivized to maximize tax revenue for products like alcohol, tobacco, and cannabis. Although alcohol and tobacco companies successfully pass higher taxes onto consumers, cannabis companies lack the ability to do the same, especially with the existence of the illicit market.

Tilray has a history of massively diluting existing shareholders when it needs capital, and the risk of that remains.