Tilray should get better, but all is not lost for this cannabis giant |

  • From a general point of view, the TLRY stock story is delayed, not interrupted.
  • But poor execution was just as big a problem as slow ESCs.
  • In the long run, the stock may still perform, but at the current valuation, it’s hard to be terribly optimistic.

One could argue that Tilray (NASDAQ:) is still on track, albeit slower than expected. Over the past few years, Tilray’s strategy has been to expand its presence in many countries and end markets in anticipation of the legalization of cannabis in major markets.

Admittedly, this strategy has not helped Tilray stock, which has fallen 76% over the past year and threatens to reach the March 2020 low. But optimists might argue that TLRY’s weakness is due to sector sell-off and/or investor impatience. not a mistake on Tilray’s part.

There may be some truth in this argument, but it is not enough. Tilray has been underperforming lately, adding to outside pressure on the stock.

The good news for TLRY is that the company has time to improve. The bad news is that although it has lost three-quarters of its value, some improvement is expected.

Long-term argument for Tilray stock

The general argument for Tilray shares is that no company is better placed to legalize cannabis globally.

In Canada, immediately after the merger of Tilray and Aphria, the combined company held a leading position in the market. Tilray held about 20% of the market, well ahead of Canopy Growth (NASDAQ:), which was in second place.

In the United States, Aphria’s acquisition of Sweetwater Brewing enabled the production of cannabis-infused beverages. More importantly, it also provided distribution access, allowing Tilray to rapidly increase sales following the federal legalization of cannabis. The Manitoba Harvest brand also allowed the company to branch out into hemp-based products.

And in Europe, through CC Pharma, Tilray owns distribution in the medical cannabis channel. The company has large manufacturing facilities in Germany and Portugal serving medical customers. Both facilities can serve adult clients on the mainland when recreational marijuana is legal.

In a world where marijuana is legal, these building blocks are perfect. Cannabis produced by Tilray can be distributed either through its own channels or through relationships established by, among others, Sweetwater and Manitoba Harvest. These companies also offer the opportunity to create a variety of cannabis products, from food to beverages.

In short, once cannabis legalization actually happens, Tilray will have its hands in almost every aspect of global trade.

What happened ?

One of the main concerns for Tilray and its Canadian competitors is that global cannabis legalization has yet to come.

Since the 2020 election, observers including Tilray chief executive Irwin Simon have predicted that the United States is on track to lift the federal ban on the product. But little progress has been made. In Europe, Simon had his hopes in Germany, where the bill is expected later this year.

A positive interpretation of TLRY here would be that the society has prepared itself for a world that does not yet exist through no fault of its own. Legalization progressed more slowly than many thought. And because of this, Tilray has manufacturing and distribution assets that are underutilized.

This will eventually change. Tilray will be able to capitalize on its positioning. At the same time, the business remains quite profitable. For fiscal year 2023, the company forecasts adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $70 million to $80 million. Further synergies from the partnership with Hexo (NASDAQ:) are expected to emerge in FY24.

Overall, the bullish scenario is that Tilray’s opportunities are still there. She just lingered. As long as the company continues to do without markets like Germany and the US, it should thrive when those markets finally open up.

Performance needs to be improved

This is an enticing bullish scenario. After a long decline, TLRY shares are not all that expensive compared to earnings or earnings. The shares are trading at about 3x this year’s sales and less than 30x EBITDA. Neither of these multiples is necessarily “cheap”, but with long-term growth on the horizon (again, at some point) both seem acceptable.

The problem is that Tilray’s performance just needs to be improved. Attention to potential markets may obscure the fact that Tilray does not operate in existing markets.

In Canada, Tilray continues to lose market share. In 2018, according to the company itself, the share of Tilray was only 8%, which is half of what it was two years ago. The results in Israel were disappointing due to a glut of the market. Even Sweetwater seems to have performed poorly in recent quarters.

Perhaps the challenges Tilray faces are not company specific. But this is not good news either. The long-term negative scenario for cannabis companies is that the product is not differentiated. This results in a race to the bottom, low profit margins and volatile market share. This is the combination Tilray is currently facing in its home market in Canada.

The Canadian environment is arguably the biggest concern for Tilray stock. If Tilray can’t win at home, at a time when publicly traded manufacturers are struggling with debt and after the biggest merger in the industry, is it sure to win in the United States? Or will established MSOs like Trulieve (OTC:) and Curaleaf Holdings (OTC:) dominate their territory?

So far, investors are choosing MSOs whose market capitalization exceeds that of their major competitors. TLRY stock is unlikely to see a sustained rise until this changes.

Disclaimer: At the time of this writing, Vince Martin does not have positions in any of the stocks mentioned.

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