Cannabis company Tilray (NASDAQ:TLRY) is undeniably a disappointment. Meme traders sent TLRY stock to an unsustainable high of $67 in February. Since then, the stock has fallen steadily.

As this Canadian cannabis firm aims to expand to the U.S., should the owners of its stock hold onto their shares?

The Bearish Outlook of TLRY Stock

The Wall Street Journal reported last week that Tilray had made a plan to expand to the U.S.,. That’s nothing new. Last year, it merged with Aphria in an effort to facilitate an aggressive expansion into the country.

The merger, however, was not a solution for Tilray’s underperformance because both firms have failed to capitalize on Canada’s legalization of cannabis.

In the U.S., multi-state operators, or MSOs, dominate the cannabis markets. They are profitable and do not spread themselves thin.  For example, Green Thumb, a pioneer of the MSO model, has a presence in 14 states.

Meanwhile, Tilray has taken too much cash from its investors. It won approval from its investors to increase the number of authorized shares of its common stock on Sept. 10. Chief Executive Officer Irwin Simon said, “Due to the support of our stockholders, Tilray now has the resources we need to build on our momentum and execute on our plans.”

The move, however, will hurt the owners of TLRY stock. The value of their shares will get diluted as the company  buys MSOs. Chances are high that Tilray will overpay for a U.S. cannabis operator. Investors can consider buying the shares of MSOs, in an effort to guess which companies Tilray may acquire.

The Legalization Opportunity

Tilray is betting that Congress will legalize cannabis throughout the U.S.,  justifying the company’s U.S. expansion plans. Tilray CFO Carl Merton told The Wall Street Journal  earlier this month, “We believe that the U.S. is closer to legalization than it ever has been, but the process will take time.”

Merton has an aggressive $4 billion revenue target by the end of fiscal 2024 for Tilray. The target assumes that Congress will legalize cannabis. But the U.S. is likely to take longer than Tilray  expects to legalize cannabis. As a result, the company will have to lower its forecasts.

Tilray is confident that it will be able to greatly boost the revenue of its MedMen unit which it acquired in August. Tilray expects the subsidiary to increase its sales by at least $1 billion to $1.5 billion by expanding to more U.S. states But it will not be able to accomplish that goal without full  legalization in the U.S.

Tilray can, however, expand in Europe. With the arrival of new administrations in Germany, Israel, and Denmark, the chances for legalization of cannabis by those nations will improve over the next 18 months.

In Portugal, Tilray has a high-quality production facility. It also has a cultivation and production facility in Germany.

Tilray’s Risks

Tilray’s Q1 net revenue rose by 43% year-over-year to $168 million. Its net cannabis revenue jumped 38% to $70 million. While its adjusted gross margin was 43%, Tilray’s Q1 net loss increased to $34.6 million, up from a $21.7 million loss during the year-earlier period.

Tilray’s synergies with Aphria will cut its costs. But the 43% YOY revenue growth was too slow to offset the 60% YOY increase in its losses.

On its Q1 earnings call, Merton, the CFO, reported that the coronavirus  had negatively impacted its results. Although the company’s business in Canada has failed to grow for many quarters, he still expressed optimism that its sales in Canada would improve, citing the positive impact of vaccinations there

But in this financial model that assumes modest growth, TLRY stock is worth less than $7.50 per share.

Most Analysts Are Mixed on TLRY Stock

On Wall Street, ten of 13 analysts rate the stock a “hold.” Their average price target is around $15.00, according to Tipranks.

The company is still losing money. On the conference call, an analyst asked why the company sees a dilution of its shares as beneficial. CFO Merton said that there will be no dilution until the company uses the money for an acquisition or another purpose. Typically, the shares of firms that acquire other companies fall.

The Bottom Line

TLRY stock is on a downtrend for a good reason. Markets expect the company to report more losses in the coming quarters. That will weigh negatively on its short-term prospects.

The company expects the U.S. Congress to legalize cannabis. But if that happens, investors are better off buying MSOs instead.

TLRY stock remains an unattractive investment.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.