In This Article:
Key Points
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Reverse stock splits are sometimes necessary for companies performing terribly.
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Tilray has a proposed reverse stock split on the table that will help it avoid getting delisted from the Nasdaq.
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This move does not change the company's gloomy prospects.
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 (NASDAQ: TLRY), 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.
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.
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.