Recently, cannabis firms such as Tilray (NASDAQ:TLRY) (TSE:TLRY) received a nice shot in the arm thanks to the reintroduction of a bipartisan banking bill called the Secure and Fair Enforcement (SAFE) Banking Act. If the SAFE Banking Act passes, TLRY stock may be a strong beneficiary. While the “botanical” industry represents a breakthrough against prior draconian norms, the sector still faces legal challenges, which the above proposal may address. I am neutral on TLRY.
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Critical Details of the Green-Friendly Legislation
As TipRanks reporter Vince Condarcuri stated, the SAFE Banking Act “has a goal to offer crucial banking and financial services to legitimate marijuana businesses while also protecting banks that collaborate with them from federal backlash.”
Notably, Condarcuri mentioned that Senator Jeff Merkley (D-OR), one of the originators of the legislation, highlighted the “urgent need to transition from an all-cash model, which he believes encourages robbery, money laundering, and organized crime. With the bill’s reintroduction, there’s now a clear route for the SAFE Banking Act to make its way through the Senate Banking Committee and ultimately be voted on in the Senate.”
Significantly, the SAFE Banking Act has been brought up several times before. According to TipRanks reporter Sirisha Bhogaraju, cannabis stocks sank late last year when multiple reports indicated that the measure “was excluded from a must-pass federal spending package.”
At the time, according to Bloomberg, “this was the third failed attempt in 2022 to get the SAFE Banking Act passed with a larger package.” While it’s impossible to state what the outcome will be, the measure now has a genuine chance of passing.
For context, Bhogaraju noted that “cannabis stocks have plunged significantly [in 2022] as the lack of favorable reforms and the delay in the legalization of cannabis at the federal level have impacted investors’ interest in this sector.”
Why TLRY Stock Finally Looks Intriguing
Should the SAFE Banking Act pass, TLRY stock and similar companies should immediately become beneficiaries due to the mooting of an ambiguity clouding the cannabis sector. Essentially, cannabis only achieved federal legality in a very narrow sense. However, because of the vulnerability of this context, financial institutions generally stay away from the sector. Thus, the aforementioned measure should inject confidence and legitimacy into the controversial ecosystem.
While the Agriculture Improvement Act of 2018 “legalized” cannabis, it came with one heavy caveat: industrial hemp or cannabidiol (CBD) cannot contain a concentration of more than 0.3% of tetrahydrocannabinol (THC). Otherwise, the product would be considered marijuana, which falls under Schedule I of the Controlled Substances Act.
So, just make sure your hemp/CBD products don’t contain more than 0.3% THC, and everything will be just fine, right? Unfortunately, it’s not that simple. As PBS explained, “CBD can be contaminated with THC, chemical solvents or pesticides if the extraction is done improperly.”
In other words, a simple, unintended accident could make financiers of otherwise legal cannabis enterprises parties to a federal crime. Understandably, then, many financial institutions wanted nothing to do with cannabis players because of the high risk, hurting TLRY stock. However, the SAFE Banking Act can protect capital supporters, making the legislation a possible game-changer.
Tilray’s Financials Could Use the Help
Another reason why the legislation is potentially beneficial for TLRY stock is that the underlying company could use the help. In the company’s latest earnings report for the quarter ended February 2023, Tilray posted revenues of C$145.59 million. That’s a conspicuous drop from the year-ago quarter’s tally of C$151.87 million.
To be fair, for the fiscal year ended May 2022, Tilray generated sales of C$628.37 million, up over 22% from the prior year’s tally of C$513.09 million. However, data from TipRanks reveals that on a trailing-12-month (TTM) basis, sales ping at only C$596.26 million.
What is expanding, if you will, are operating losses. In Fiscal 2021, Tilray posted an operating loss of C$68.56 million. In the following year, it posted a loss of C$277.49 million. On a TTM basis, it’s looking at a loss of C$284.65 million. Again, the company could use the help.
Is TLRY Stock a Buy, According to Analysts?
Turning to Wall Street, TLRY stock has a Moderate Buy consensus rating based on two Buys, two Holds, and zero Sell ratings. The average TLRY stock price target is $3.63, implying 59.2% upside potential.
The Takeaway: TLRY Stock Could Get a Lifeline
Although TLRY stock fundamentally intrigues because, in a prior paradigm, it had no chance of existing, Tilray and its ilk nevertheless suffered from a legal ambiguity. However, the SAFE Banking Act may address this blind spot, thus practically legitimating the controversial cannabis sector. Nevertheless, the legislation still needs to pass, and that’s no guarantee.
