Tilray’s [TLRY] stock has seen some rocky trading since its merger with rival Aphria in early May. The team created one of the biggest cannabis producers on the planet, combining Tilray’s medicinal business in Europe and Australia with Aphria’s robust recreational businesses in Canada and a pharmaceutical distribution network. Yet investors seem unimpressed with Tilray’s stock, down nearly 20% since close on May 3 to close on August 24.
Its proposed expansion into the US market could make or break the long-term investment case for Tilray’s stock. While some forms of use of cannabis have been legalised most states, legislation at a federal level is still elusive.
Hopes are that could change with the Democrats in charge of the White House, the senate and congress. Even some Republicans have warmed to decriminalising the drug. However, in July Senate Majority Chuck Schumer admitted he did not have the necessary votes yet to decriminalise marijuana at a federal level and have it struck from the controlled substances list of the US Food and Drug Administration. The stance can potentially change.
In preparation, Tilray has been making serious investments in US companies which means it could be well-positioned to benefit.
What’s the investment case for Tilray?
Tilray has been making plenty of avenues into the US. In August, Tilray struck a deal with MedMen to buy convertible bonds in the company, a US-based cannabis dispensary and delivery service. These can be converted to a 21% stake in MedMen should cannabis get approved at a Federal level in the US. Currently, pot companies cannot buy US companies outright as the drug is still banned centrally.
“The investment we are announcing in MedMen securities today, one of the most recognized brands in the $80 billion U.S. cannabis market, is a critical step toward delivering on our objective as we work to enable Tilray to lead the U.S. market when legalization allows,” Tilray Chief Executive Irwin Simon said in a statement.
Tilray’s stock climbed over 7% on the day the announcement was made in intraday trading, before closing up over 1%.
Tilray also has a stake in SweetWaterBrewing Co which makes cannabis-infused beverages. On Tilray’s last earning call, its management outlined a vision in which it could more than quadruple 2020 earnings to rake in $4bn annual sales by 2024, with over $1bn coming from US assets.
“We can only speculate about what comes next, but Tilray management has implied it also wants US cultivation and brands; whether this will mean a vertically integrated operator of a brand remains unclear at this stage” - Cantor Fitzgerald analyst Pablo Zuanic
“While MedMen is only one small step in that US journey (~$120Mn in sales), it lends credence to the vision outlined less than a month ago,” says Cantor Fitzgerald analyst Pablo Zuanic.
“We can only speculate about what comes next, but Tilray management has implied it also wants US cultivation and brands; whether this will mean a vertically integrated operator of a brand remains unclear at this stage.”
Other tailwinds for Tilray’s stock
Solely focusing on the investment case posed by the US would be doing Tilray a disservice. In its recent fourth-quarter results, the cannabis producer posted a net income of $33.6m, reversing the $84.3m loss in the same period the previous year, with operating profit or EBITDA of $12.3m. The turnaround was largely due to Canada’s reopening dispensaries and other activities after the COVID lockdown.
Tilray’s stock surged 24% in intraday trading on August 10 following the results, but has since seen those gains fizzle out. The stock is now up just over 1% since the results came out, broadly correlating to the performance of the Global X Cannabis ETF [POTX] decline over the same period.
Wall Street expects Tilray will continue to see sales growth over the next couple of years, with $837.66M this year, up 63.30% year-on-year, and $1.01bn in 2022, a 20.30% year-on-year increase, according to data from Yahoo Finance. Losses per share are expected to come in at $0.18 for 2021, an improvement on the previous year’s $1.19 loss per share, before narrowing further in 2022 with a $0.06 loss per share.
“The resilience of net revenue generated by its cannabis and beverage alcohol segments was positive in light of stubborn pressures on consumers from Covid-19 lockdowns and restrictions” - Kenneth Shea
“The performance this quarter, the first since the reverse acquisition of Tilray by Aphria in May, highlights the diversity of the combined businesses. The resilience of net revenue generated by its cannabis and beverage alcohol segments was positive in light of stubborn pressures on consumers from Covid-19 lockdowns and restrictions,” said Kenneth Shea, BI tobacco and beverage industry analyst at Bloomberg.
Will Tilray’s stock outperform?
Cannabis is already legal in 35 states, with 16 allowing adults to legally use it for recreational purposes. President Biden has said that he believes cannabis should be decriminalised in the US, while more than half of Americans, 67% of Americans believe the use of marijuana should be legalized, according to a survey from Pew Research.
Investment bank Cowen reckons the US marijuana industry will generate around $75 billion in gross sales by 2030, up from $50bn in 2026. In June, Cowen analyst Vivien Azer raised the price target on Tilray from $20 to $23 - one of the more bullish targets on the stock. Pablo Zuanic at Cantor Fitzgerald has an Overweight rating on the stock to go with his $19 price target, while the average price target on Yahoo Finance is coming in at $17.57, a decent 27% upside on Tuesday’s close.