TLRY Stock Analysis - Why Tilray could be a leading cannabis stock to add to your portfolio

Due to the volatility of this stock, I’ve taken a perspective from an industry outlook to justify that Tilray presents potential growth as a leading cannabis company in the next few years. If you are looking for a cannabis stock to buy then TLRY might be a solid pick. The company presents a strong infrastructure with a multinational supply chain and distribution network, as well as strategic acquisitions that position them for long-term growth in a high-growth market.  Company Overview Tilray Inc. (NASDAQ: TLRY, TSE: TLRY) engages in the research, cultivation, production and distribution of medical cannabis and cannabinoids. The company supplies high-quality medical cannabis products to tens of thousands of patients in 17 countries spanning 5 continents through their subsidiaries in Australia, Germany, Latin America, Portugal, and Canada. They only operate in countries where cannabis or hemp-derived cannabinoids are legal and permitted under applicable federal, state, provincial and local laws. Tilray continues to be a pioneer in the development of the global cannabis market and was one of the first companies to be licensed by Health Canada to cultivate medical and to be a licensed seller in Canada. They were also the first company to legally export medical cannabis from North America to countries in Europe, Africa, Latin America, etc. Brand and Products: The Tilray brand is their medical brand that’s been established as a global medical cannabis brand and is designed to appeal to prescribers and patients in the global medical market. High Park Holdings Ltd. is their subsidiary that was established to develop, produce, sell and distribute adult-use cannabis produces for recreational purposes Portfolio and pricing strategies designed to compete in all tiers and product categories of the Canadian adult-use market to maintain and grow their market share Brands such as: Canaca – a brand that is built upon a homegrown heritage with products such as pre-rolls, oil products and pure cannabis vapes Marley Natural – crafted with a focus on wellness and the positive potential of the herb Chowie Wowie - an edibles brand offering an array of reliably dosed cannabis-infused chocolates and gummies in THC and CBD Everie – a joint venture with Labatt Breweries of Canada offering non-alcoholic CBD-infused beverages with 98% pure CBD isolate and all-natural flavours Many more brands Tilray Inc.’s strategy focuses on approaching the business from a long-term and global perspective. The company “aspires to build the world’s most trusted and valuable global cannabis and hemp company through several key strategies” such as: Partnering with established distributors and retailers Developing a differentiated portfolio of brands and products to appeal to diverse sets of patients and consumers Leveraging their production capacity in North American and Europe to meet current and long-term demand growth that is to be expected Financial Information Revenue: Tilray’s operating results are reported in two business segments: (1) licensed cannabis and (2) unlicensed hemp. Total cannabis revenue totalled $133,605,000 USD and accounted for 63.5% of total revenue. Of the total cannabis revenue, the adult-use channel generated the most at 62.7%, followed by international medical use, Canada’s medical use and bulk sales contributing the least. Total hemp revenue totalled $76,877,000 USD and accounted for 35.5% of the total revenue. YoY revenue change increased 26% that was driven by 25% growth in the cannabis segment and 28% by the hemp segment. General Expenses: Tilray’s biggest expenses in FY2020 were their general and administrative expenses which totalled $85,883,000 USD or 41% of the revenue. Despite this high expense, it showed a YoY decrease of 23% compared to 2019 due to the realization of implemented cost savings initiatives that saw a reduced headcount of 258 positions and also a non-recurring cost of $4.8 million for severance payments. Gross Margin: Tilray has a gross margin of 12% for FY 2020 that increased from 2019 comparable period of -14%. Gross Margin for Cannabis: Tilray’s 3% gross margin in 2020 improved from the comparable period in 2019 primarily due to reduced inventory valuation adjustments and overall improvements in their cost of production relating to their cost-cutting efforts. If excluding inventory adjustments, then gross margin increased by 23% from 20% in 2019 and the improvement is attributable to the increased sales in the international medical markets and the introduction of new products into the adult-use market.  Gross Margin for Hemp: Tilray’s gross margin of 37% in 2020 increased compared to 2019 due to reduced inventory adjustments. If excluding inventory adjustments, we come to a gross margin percentage of 42% that represents a decrease from 2019 and this is due to the increased promotional activity for their hemp products.  Recent Developments On December 15, 2020, Tilray Inc. and Aphria Inc. entered into an agreement that would unite two of the biggest names in the legal cannabis industry. Under the terms of this agreement, each Aprhia share will be exchanged for 0.8381 of a Tilray share and as a result of this exchange ratio, Aphria shareholders will own 62% of the combined company’s common shares. This nearly $4B deal was closed last month in May and formally merged the two companies. With Aphria’s recreational position in Canada combined with Tilray’s strength in the international markets, this merger will make Tilray an industry leader in the Canadian pot market and in a position to generate more growth in many more markets. “Our focus now turns to execution on our highest return priorities including business integration and accelerating our global growth strategy” – CEO Irwin Simon after the deal was closed Industry Statistics and Outlook The global cannabis market is estimated to be valued at $20.5B in 2020 and projected to reach $90.4B by 2026 – representing a CAGR of 28% Market primarily to be driven by the medical use of cannabis and the legalization of marijuana North American accounted for the largest market share of 79.6% in 2020 for both medical and recreational purposes Europe projected to grow at the highest CAGR during the forecast period due to increasing legalization Adult-use segment dominated the market with a revenue share of 54.6% in 2020 and expected to expand at the highest CAGR during the forecast period The global cannabis beverages market estimated to reach $2.8B by 2025 and grow at CAGR of 17.8% from 2019 to 2025 Heavily fragmented market due to the presence of medium and small-scale companies With Tilray’s entry into this market already combined with the Aphria merger (with the acquisition of SweetWater), Tilray has a strong backing and R&D to take over a lot of the North American market share The Canadian cannabis industry is worth an estimated $2.2B in annual sales Second fastest growing industry in Canada at more than 28% annually Investment Thesis: Strategic Acquisitions and Mergers Aphria’s strong balance sheet and financials provide a great platform for future profitability and cash flow generation with many growth opportunities. As well, the combined company will have access to capital giving the company the power to easily accelerate its growth and deliver attractive returns for shareholders.  Together with Aprhia, Tilray has a portfolio of carefully curated brands with diverse product offerings across all consumer segments. Tilray’s merger with Aphria will increase its Canadian market share and further diversify its available product offerings. Aphria’s acquisition of SweetWater Brewing Company, a cannabis lifestyle branded craft brewer, in November 2020 gave the business a position in setting up to sell cannabis-infused beverages once legal in the U.S. As well, Tilray’s most recent agreement with Authentic Brands Group and also the acquisition of Manitoba Harvest, a leading hemp food manufacturer and pioneer in branded CBD and wellness products, will also allow Tilray to penetrate the U.S market and enter a new line of products. Currently with the merger, Tilray will offer products in every major cannabis category such as flower, pre-roll, oils, capsules, vapes, edibles and beverages and establish a stronger brand and presence worldwide. With potential legislation changes ahead towards the legalization of marijuana, it will give the industry immense potential for growth in the coming years. With established segments in cannabis-infused beverages through SweetWater and hemp, CBD and wellness products through Manitoba Harvest, Tilray is positioned with strong financials to execute its growth strategy. When marijuana becomes legal in other parts of the world, Tilray will be well-positioned to compete in the market given its strong brand and distribution system in place.  Risks Competition from the illicit cannabis market could impact their ability to succeed. Competition from marijuana black markets limits Tilray’s ability to potentially increase product pricing. Despite the legalization of medical and adult-use cannabis in Canada, illegal dispensaries and black markets are abundant and a direct competitor to their business. In addition, these illicit market operations may offer products with higher concentrations than what is prohibited under Canadian regulations and may offer lower prices. This adversely affects Tilray’s market share and potential sales. Research of the health effects of medical cannabis is relatively new and subject to further study which could impact demand for their medical cannabis products. Research regarding the viability, safety, efficacy and dosing of cannabis or isolated cannabinoids such as CBD and THC remains in early stages. Future research and clinical trials may draw opposing conclusions to Tilray’s business and adversely affect the social acceptance of cannabis and demand for its products. Sources: https://www.bnnbloomberg.ca/aphria-tilray-confirm-deal-to-create-new-pot-sector-giant-1.1537206 https://www.thestreet.com/investing/cannabis-provider-tilray-stock-upgraded-overweight-at-cantor-fitzgerald https://www.globenewswire.com/news-release/2021/02/18/2177949/0/en/The-Worldwide-Cannabis-Industry-is-Projected-to-Reach-90-4-Billion-by-2026.html https://www.hubinternational.com/en-CA/insights/outlook-2021/cannabis/ https://www.grandviewresearch.com/press-release/global-legal-marijuana-market https://www.prnewswire.com/news-releases/cannabis-beverages-market-size-to-expand-at-17-8-cagr-by-2025--owing-to-increase-in-sale-of-cannabis-infused-drinks--million-insights-301247061.html https://ir.tilray.com/node/8766/html

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Jun 4, 2021

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Change % Since Posting

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Price When Posted

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Change Since Posting

TLRY

Tilray Inc - Class 2

11.76

-0.47
-3.81%
Current Price

TLRY Stock Analysis - Why Tilray could be a leading cannabis stock to add to your portfolio

bullish

Due to the volatility of this stock, I’ve taken a perspective from an industry outlook to justify that Tilray presents potential growth as a leading cannabis company in the next few years. If you are looking for a cannabis stock to buy then TLRY might be a solid pick. The company presents a strong infrastructure with a multinational supply chain and distribution network, as well as strategic acquisitions that position them for long-term growth in a high-growth market. 

Company Overview

Tilray Inc. (NASDAQ: TLRY, TSE: TLRY) engages in the research, cultivation, production and distribution of medical cannabis and cannabinoids. The company supplies high-quality medical cannabis products to tens of thousands of patients in 17 countries spanning 5 continents through their subsidiaries in Australia, Germany, Latin America, Portugal, and Canada. They only operate in countries where cannabis or hemp-derived cannabinoids are legal and permitted under applicable federal, state, provincial and local laws. Tilray continues to be a pioneer in the development of the global cannabis market and was one of the first companies to be licensed by Health Canada to cultivate medical and to be a licensed seller in Canada. They were also the first company to legally export medical cannabis from North America to countries in Europe, Africa, Latin America, etc.

Brand and Products:

The Tilray brand is their medical brand that’s been established as a global medical cannabis brand and is designed to appeal to prescribers and patients in the global medical market.

High Park Holdings Ltd. is their subsidiary that was established to develop, produce, sell and distribute adult-use cannabis produces for recreational purposes

  • Portfolio and pricing strategies designed to compete in all tiers and product categories of the Canadian adult-use market to maintain and grow their market share
  • Brands such as:
    • Canaca – a brand that is built upon a homegrown heritage with products such as pre-rolls, oil products and pure cannabis vapes
    • Marley Natural – crafted with a focus on wellness and the positive potential of the herb
    • Chowie Wowie - an edibles brand offering an array of reliably dosed cannabis-infused chocolates and gummies in THC and CBD
    • Everie – a joint venture with Labatt Breweries of Canada offering non-alcoholic CBD-infused beverages with 98% pure CBD isolate and all-natural flavours
    • Many more brands

Tilray Inc.’s strategy focuses on approaching the business from a long-term and global perspective. The company “aspires to build the world’s most trusted and valuable global cannabis and hemp company through several key strategies” such as:

  • Partnering with established distributors and retailers
  • Developing a differentiated portfolio of brands and products to appeal to diverse sets of patients and consumers
  • Leveraging their production capacity in North American and Europe to meet current and long-term demand growth that is to be expected

Financial Information

Revenue: Tilray’s operating results are reported in two business segments: (1) licensed cannabis and (2) unlicensed hemp. Total cannabis revenue totalled $133,605,000 USD and accounted for 63.5% of total revenue. Of the total cannabis revenue, the adult-use channel generated the most at 62.7%, followed by international medical use, Canada’s medical use and bulk sales contributing the least. Total hemp revenue totalled $76,877,000 USD and accounted for 35.5% of the total revenue. YoY revenue change increased 26% that was driven by 25% growth in the cannabis segment and 28% by the hemp segment.

General Expenses: Tilray’s biggest expenses in FY2020 were their general and administrative expenses which totalled $85,883,000 USD or 41% of the revenue. Despite this high expense, it showed a YoY decrease of 23% compared to 2019 due to the realization of implemented cost savings initiatives that saw a reduced headcount of 258 positions and also a non-recurring cost of $4.8 million for severance payments.

Gross Margin: Tilray has a gross margin of 12% for FY 2020 that increased from 2019 comparable period of -14%.

  • Gross Margin for Cannabis: Tilray’s 3% gross margin in 2020 improved from the comparable period in 2019 primarily due to reduced inventory valuation adjustments and overall improvements in their cost of production relating to their cost-cutting efforts. If excluding inventory adjustments, then gross margin increased by 23% from 20% in 2019 and the improvement is attributable to the increased sales in the international medical markets and the introduction of new products into the adult-use market. 
  • Gross Margin for Hemp: Tilray’s gross margin of 37% in 2020 increased compared to 2019 due to reduced inventory adjustments. If excluding inventory adjustments, we come to a gross margin percentage of 42% that represents a decrease from 2019 and this is due to the increased promotional activity for their hemp products. 

Recent Developments

On December 15, 2020, Tilray Inc. and Aphria Inc. entered into an agreement that would unite two of the biggest names in the legal cannabis industry. Under the terms of this agreement, each Aprhia share will be exchanged for 0.8381 of a Tilray share and as a result of this exchange ratio, Aphria shareholders will own 62% of the combined company’s common shares. This nearly $4B deal was closed last month in May and formally merged the two companies. With Aphria’s recreational position in Canada combined with Tilray’s strength in the international markets, this merger will make Tilray an industry leader in the Canadian pot market and in a position to generate more growth in many more markets.

“Our focus now turns to execution on our highest return priorities including business integration and accelerating our global growth strategy” – CEO Irwin Simon after the deal was closed

Industry Statistics and Outlook

  • The global cannabis market is estimated to be valued at $20.5B in 2020 and projected to reach $90.4B by 2026 – representing a CAGR of 28%
    • Market primarily to be driven by the medical use of cannabis and the legalization of marijuana
    • North American accounted for the largest market share of 79.6% in 2020 for both medical and recreational purposes
    • Europe projected to grow at the highest CAGR during the forecast period due to increasing legalization
    • Adult-use segment dominated the market with a revenue share of 54.6% in 2020 and expected to expand at the highest CAGR during the forecast period
  • The global cannabis beverages market estimated to reach $2.8B by 2025 and grow at CAGR of 17.8% from 2019 to 2025
    • Heavily fragmented market due to the presence of medium and small-scale companies
    • With Tilray’s entry into this market already combined with the Aphria merger (with the acquisition of SweetWater), Tilray has a strong backing and R&D to take over a lot of the North American market share
  • The Canadian cannabis industry is worth an estimated $2.2B in annual sales
    • Second fastest growing industry in Canada at more than 28% annually

Investment Thesis: Strategic Acquisitions and Mergers

Aphria’s strong balance sheet and financials provide a great platform for future profitability and cash flow generation with many growth opportunities. As well, the combined company will have access to capital giving the company the power to easily accelerate its growth and deliver attractive returns for shareholders. 

Together with Aprhia, Tilray has a portfolio of carefully curated brands with diverse product offerings across all consumer segments. Tilray’s merger with Aphria will increase its Canadian market share and further diversify its available product offerings. Aphria’s acquisition of SweetWater Brewing Company, a cannabis lifestyle branded craft brewer, in November 2020 gave the business a position in setting up to sell cannabis-infused beverages once legal in the U.S. As well, Tilray’s most recent agreement with Authentic Brands Group and also the acquisition of Manitoba Harvest, a leading hemp food manufacturer and pioneer in branded CBD and wellness products, will also allow Tilray to penetrate the U.S market and enter a new line of products. Currently with the merger, Tilray will offer products in every major cannabis category such as flower, pre-roll, oils, capsules, vapes, edibles and beverages and establish a stronger brand and presence worldwide.

With potential legislation changes ahead towards the legalization of marijuana, it will give the industry immense potential for growth in the coming years. With established segments in cannabis-infused beverages through SweetWater and hemp, CBD and wellness products through Manitoba Harvest, Tilray is positioned with strong financials to execute its growth strategy. When marijuana becomes legal in other parts of the world, Tilray will be well-positioned to compete in the market given its strong brand and distribution system in place. 

Risks

Competition from the illicit cannabis market could impact their ability to succeed. Competition from marijuana black markets limits Tilray’s ability to potentially increase product pricing. Despite the legalization of medical and adult-use cannabis in Canada, illegal dispensaries and black markets are abundant and a direct competitor to their business. In addition, these illicit market operations may offer products with higher concentrations than what is prohibited under Canadian regulations and may offer lower prices. This adversely affects Tilray’s market share and potential sales.

Research of the health effects of medical cannabis is relatively new and subject to further study which could impact demand for their medical cannabis products. Research regarding the viability, safety, efficacy and dosing of cannabis or isolated cannabinoids such as CBD and THC remains in early stages. Future research and clinical trials may draw opposing conclusions to Tilray’s business and adversely affect the social acceptance of cannabis and demand for its products.

 

Sources:

  1. https://www.bnnbloomberg.ca/aphria-tilray-confirm-deal-to-create-new-pot-sector-giant-1.1537206
  2. https://www.thestreet.com/investing/cannabis-provider-tilray-stock-upgraded-overweight-at-cantor-fitzgerald
  3. https://www.globenewswire.com/news-release/2021/02/18/2177949/0/en/The-Worldwide-Cannabis-Industry-is-Projected-to-Reach-90-4-Billion-by-2026.html
  4. https://www.hubinternational.com/en-CA/insights/outlook-2021/cannabis/
  5. https://www.grandviewresearch.com/press-release/global-legal-marijuana-market
  6. https://www.prnewswire.com/news-releases/cannabis-beverages-market-size-to-expand-at-17-8-cagr-by-2025--owing-to-increase-in-sale-of-cannabis-infused-drinks--million-insights-301247061.html
  7. https://ir.tilray.com/node/8766/html

 

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