Why Tilray Should Be Reduced: Assessing the Long-Term Viability and Risk-Reward Profile

The cannabis industry in 2025 is at a crossroads, with regulatory uncertainty and operational underperformance creating a high-risk environment for investors. Tilray Brands (NASDAQ: TLRY), once a poster child for the sector's potential, now faces a confluence of challenges that undermine its long-term viability. While the company has shown resilience in certain markets, its exposure to fragmented regulations, financial inefficiencies, and international bottlenecks suggests that investors should consider reducing their positions until clearer regulatory and operational clarity emerges.

Regulatory Uncertainty: A Persistent Headwind

Tilray's core operations remain shackled by the U.S. federal classification of cannabis as a Schedule I substance. Despite speculation about potential reclassification under the Trump administration, no concrete policy shifts have materialized. The absence of federal reform perpetuates the 280E tax code, which prohibits cannabis companies from deducting standard business expenses. This alone inflates effective tax rates and erodes profitability. For Tilray, which reported a 29.3% gross margin in Q4 2025, the inability to access traditional banking services further compounds operational costs, forcing reliance on cash-heavy systems that increase security risks and limit scalability.

State-level regulatory fragmentation exacerbates these issues. In Connecticut, social equity licensees are pushing to sell their businesses after just three years, undermining the original intent of supporting marginalized communities. Indiana's proposed ban on cannabis advertising could stifle brand visibility, while Missouri's crackdown on predatory business practices highlights the sector's susceptibility to regulatory overreach. Meanwhile, New York's struggles with illegal market diversion—where out-of-state products undercut legal sales by 30–50%—underscore the fragility of state-level markets. These inconsistencies create a patchwork of compliance requirements, forcing Tilray to divert resources toward legal and operational adjustments rather than growth.

Internationally, Tilray's expansion into Germany and other European markets has been hampered by bureaucratic delays. In Q2 2025, export permit bottlenecks in Portugal and Spain prevented $8 million in international sales from being recognized. While Germany's medical cannabis market is projected to reach $1.5 billion by 2025, the country's strict regulatory framework and slow permitting processes remain significant hurdles. Similarly, Canada's competitive landscape—dominated by rivals like Canopy Growth and Aurora Cannabis—has squeezed Tilray's margins, despite its $4.3 billion market potential.

Operational Underperformance: A Struggle for Profitability

Tilray's financial metrics reveal a company grappling with operational inefficiencies. While its Q4 2025 adjusted EPS of $0.02 exceeded expectations and its EBITDA guidance of $62–72 million for fiscal 2026 signals cautious optimism, these figures mask deeper structural issues. The company's gross margin of 29.3% lags behind industry peers, and its current ratio of 2.5, though improved, still reflects a reliance on short-term liquidity to fund operations.

International cannabis revenue grew 19% in fiscal 2025, driven by Europe and emerging markets, but this growth is uneven. For instance, Tilray's Q4 2025 international revenue surged 71%, yet this was partly offset by U.S. market challenges. The company's debt reduction—$100 million repaid since fiscal 2025's start—has improved its net debt to EBITDA ratio to 0.3x, but this progress is overshadowed by the lack of a clear path to profitability.

Tilray's valuation, trading at a price-to-sales ratio of 1.2x (compared to the S&P 500's 3.2x), suggests market pessimism. While this low valuation could imply upside potential, it also reflects investor skepticism about the company's ability to navigate regulatory and operational headwinds.

The Risk-Reward Imbalance

The risk-reward profile for Tilray remains skewed toward risk. Regulatory uncertainty—both in the U.S. and internationally—continues to dominate the company's outlook. The proposed STATES Act, which could provide federal regulatory clarity, lacks a Senate companion and faces an uphill battle in a divided Congress. Meanwhile, the Supreme Court's recent ruling on workplace cannabis use highlights the sector's unresolved legal complexities.

Internationally, Tilray's exposure to export delays and competitive pressures in key markets like Germany and Canada further complicates its growth trajectory. While the company's focus on international expansion is strategic, the lack of a unified global regulatory framework limits its ability to scale efficiently.

Investment Advice: A Case for Reduction

Given these challenges, investors should consider reducing their exposure to Tilray until the regulatory and operational risks are mitigated. The company's reliance on speculative policy shifts—such as potential cannabis rescheduling or the passage of the SAFER Banking Act—introduces volatility that may not be justified by its current financial performance.

While Tilray's low valuation and international momentum offer some appeal, the sector's structural headwinds—280E, fragmented regulations, and international bottlenecks—remain unresolved. Until there is meaningful progress on federal reform and regulatory harmonization, Tilray's risk-reward profile remains unattractive. Investors seeking exposure to the cannabis sector may find better opportunities in companies with clearer regulatory pathways or diversified revenue streams.

In conclusion, Tilray's long-term viability hinges on external factors beyond its control. Until the regulatory fog clears and operational efficiencies improve, reducing a position in the stock is a prudent move for risk-averse investors.