Tilray Stock – Latest Trends and Insights December 2019

Tilray is one of the most famous cannabis companies on the planet, primarily for what happened to the Tilray stock price, shortly after its IPO.

Disclaimer: Past performance is not an indicator of future performance.

Tilray (NASDAQ:TLRY) became the first cannabis company on the planet to list directly on one of the major US exchanges, when it listed on the Nasdaq in July 2018 at US$17 per share. It hung around there for a few weeks, before going completely hyperbolic and climbing to an intraday high of just north of $300 per share. A tightly held float, with vivacious, frothy, herd mentality buying, took this stock into the stratosphere.

Tilray stock officially wears the crown as the hottest IPO of 2018

Fortune Magazine

From there, however, there is only one way …down.  At the time of writing the Tilray stock price is currently $21.57 per share. This is a long way down from the heady highs the company was trading at, but far more realistic based on its current execution and future global potential.

Is Tilray stock going to make a comeback?

The current market for capital in Canada and the US is very weak. This has been displayed in the recent financing deals that KushCo and Zenerbis undertook, that were both at a significant discount to the weighted average 30-day price, and both ensured that the share prices of the respective companies got hammered post the announcement of the raise (KSHB lost over 50% of its value in one week).

Tilray also has a poor net-debt position, with almost 3 times the amount of debt on the book to cash. They are going to have to raise capital at some point and we see this continuing to have short term pressure on the Tilray stock price. Low cash balance means continued overhand pressure on TLRY stock. We are currently neutral on the stock and believe that for the moment the Tilray stock price remains in a fair trading band.

Tilray's Unique business model

The company has always positioned itself (alongside Cronos) as operating an assert-light model. In other words, the company does not heavily invest in cultivation, but rather sources cannabis from other third parties and then focuses more of its capital, energy and time on the latter stages of the cannabis value chain. 

In Canada, over the next 12 months, we believe the market has the potential to reach a balance between supply and demand for raw materials including flower and oil. As such, we remain confident in our cultivation asset-light model and ability to sign long-term wholesale supply agreements as we focus on the cannabis value chain further downstream. We view ourselves as builders of high-quality trusted brands, not farmers.

Brendan Kennedy, Tilray CEO

Tilray's global growth strategy is based on a very clear 5-step process. It starts with supply. Tilray looks to aggressively increase its global production and manufacturing capability in order to better serve the globally expanding medicinal markets (and of course the recreational market in their own back yard).

The second phase of this is then to scale this growth. This is clearly evident when you consider their cultivation capacity and footprint. TLRY started in early 2018 with one 60,000 square foot facility in Nanaimo. By the beginning of 2019, that footprint had already scaled to 1.1 million square feet, and as at August 2019, that number had scaled again…to just over 3.4 million square feet.

Tilray International Operations
Source: Tilray Stock Company Presentation

The third phase is the key, building on this scale by leveraging the power and reach of international distribution and consumer good companies. This allows Tilray to scale their sales in a capital-light manner, and not by trying to own the entire value chain.

The fourth key phase is to build a differentiated portfolio of brands, products and form factors that appeal to a diverse set of patients and consumers. And finally, fifth, to work with governments in opening new regions to increase the total addressable medicinal patient base. 

Tilray's medicinal cannabis focus

Right now, only 2 out of a possible 198 countries have legalised for recreational (adult-use) cannabis – Canada and Uruguay. Potentially, over the next 24 months, another 4 countries might legalise – Mexico and New Zealand could be two of them.  But TLRY has always been about the medical markets.

41 out of the 198 have already legalised for medicinal cannabis and this number is expected to double in the coming 24 months. Tilray currently supplies 13 of these countries and that number continues to grow. TLRY aim to take advantage of a rapidly expanding addressable market, with Europe being the jewel in that crown.

Tilray Medicinal Cannabis Production footprint
Source: Company Presentation

It has established its primary cultivation and distribution base for the EU in Portugal.  The 2.5 million square foot facility will take advantage of Portugal's superb growing climate and labour.

It is expected that an additional 14 EU countries will legalise for medicinal use in the coming 24 months, with France being the pick of the bunch in terms of opportunity. And TLRY is planning, preparing and building for European domination.

In addition, the site will act as their production hub, with raw materials being imported, then produced, and the finished goods exported across Europe. In order to produce cannabis for the EU, it must come from an EU-GMP certified facility. Tilray already has one of these but is on track to have their second, in Portugal, finally certified by the end of 2019. This would be a big catalyst for the Tilray stock price.

The two biggest opportunities on the European continent right now, lie in Germany and the UK. The German market is the largest medicinal market on the planet, and one of the most lucrative given it is the only market, where the national health care companies cover the cost.  With 6 distribution partners, TLRY currently exports both flowers and oils to the German market. 

In the UK, considered to be around 2x the size of the Canadian market, TLRY gained approval to bulk import 6 of its current product range in June 2019, as the UK market suddenly opened following very quick policy reform. 

It also has a global pharmaceutical partnership with Sandoz (a Novartis division) to co-brand, market, and sell products in other countries and markets. This includes the development of product-IP as it currently conducts 9 sets of clinical trials across the globe.

The latest news impacting the Tilray stock:

Tilray is one of the most active global cannabis companies. They are continuously expanding their market share, whilst simultaneously driving innovation and create unique medicinal IP. Here are a few of the latest announcements and stories that impact the Tilray stock price.

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Tilray's drive to be the Coca-Cola of cannabis?

The company states that they're building a multi-billion dollar global consumer packaged goods company with a portfolio of medical, wellness and adult-use brands that consumers love. Although TLRY started with an extreme focus on medicinal cannabis, they also positioned themselves to take advantage of a booming recreational market in Canada. 

We consider ourselves Brand Builders, not farmers

Brendon Kennedy, Tilray CEO

They now boast coast-to-coast distribution across Canada with five different brands and over 50 SKU's. They have minority investments in 3 retailers and a definitive agreement to acquire the FOUR20 retail business.

High Park Company – Tilray's Recreational Cannabis Company

High Park is a vertically integrated recreationally-centric, cannabis company. It was established in order to produce, sell and distribute a portfolio of adult-use cannabis brands and form factors. The company operates as a wholly-owned subsidiary of TLRY.

Tilray recreational cannabis production footprint
Source: Company Presentation

TLRY is well placed for the oncoming Canadian legalisation of extracts and edibles. They have launched two new brands – Marley Natural (an established cannabis brand, exclusively licensing the Bob Markey brand) and Goodship. Goodship, is already a cult edibles brand known for its cannabis-infused chocolates and other savoury items. The joint venture will launch the brand with a cannabis-infused oil, that can be used in various recipes.

TLRY and AB InBev announced that its partnership and joint venture, through High Park and Labatt Breweries of Canada, has become the Fluent Beverage Company. Fluent plans to commercialise non-alcohol, CBD-infused beverages in Canada. The beverages market is expected to be one of the most exciting parts of the market with many of the larger LP's also lining up their drinks and waters and this is one area that investors should look to, to have an impact on the TLRY stock price.

Authentic Brands

Tilray profit sharing venture with Authentic Brands Group
Source: Tilray Stock Company Presentation

Earlier in the year, TLRY announced a joint venture agreement with the American-based Authentic Brands Group (ABG). The arrangement – a profit-sharing agreement – meant that Tilray would take on the responsibility for designing, developing and producing CBD-derived products that ABG would then leverage and distribute through one of their portfolio brands.

We recently completed some initial pilot marketing with Nine West. We expect our first product launch to be in the United States in the near future. Tilray is also working with ABG to commercialize other brands in Europe by early 2020.

Brendan Kennedy, Tilray CEO

Basically, TLRY is guaranteed to receive 49% of the after-expense profit generated through any deal in perpetuity. This is also underwritten with a minimum of $10 million per year for the first 10 years. TLRY also paid ABG $100 million for the right to be their exclusive CBD and ingredient supplier for these products.

Tilray acquires Manitoba Harvest and enters the CBD market

The Hemp-derived CBD market is one of the fastest-growing markets on the planet. The Brightfield Group believe the market to be worth north of $22 billion by the end of 2022. Although we feel that may be a little optimistic, there is no doubt, that this is a booming industry.

Tilray and Manitoba Harvest hemp-derived CBD products
Source: Tilray Stock Company Presentation

Although hemp food companies are associated with very low gross margins and operate in a highly competitive, low barrier-to-entry, environment, Tilray was quite specific as to why this was a strategic acquisition. In a word – distribution.

Manitoba Harvest currently supplies around 70% of all hemp food to the US market through its brick-and-mortar reach of over 13,000 stores in the US (3,500 in Canada), and through various online sources. Manitoba brings TLRY reach in the largest hemp market on the planet. 

Our strategy for the United States is all around building a portfolio of trusted CBD brands in the states we're legally permitted to do so. While we have a foothold with Manitoba Harvest, we will continue to build a platform of brands and products through acquisitions and partnerships such as Smith & Sinclair and Authentic Brands Group, both of which we expect to launch CBD products by the end of the year.

Brendan Kennedy, Tilray CEO

If one then considers the opportunity for CBD, and overlay that against one of the strongest distribution plays in North America, then this deal really starts to make sense. It's not about the hemp food industry, but rather the CBD industry, and the ability for TLRY to tap into existing supply agreements with the likes of Walmart and Costco, to name drop just a few.

Tilray Stock Q3 earnings for the period ending September 30, 2019. 

Overall revenue increased to US$51.1 million(up 408% over the corresponding period last year ) and was driven by another strong quarter in Manitoba. "To put this in perspective, our Q3 revenue alone was 18% greater than our revenue for the full year of 2018," said Mark Castaneda, the Tilray CFO.

However, its cannabis revenue (which accounted for 31% of the total and did increase sequentially quarter-on-quarter, saw a dramatic decrease in the average selling price per gram, to $2.88 per gram (from $4.89 per gram in Q2). This was as a result of higher sales in the recreational market of their value-brand – The Badge – which is low-priced cannabis aimed at the "value-conscious" consumer (read: a race to the bottom).

Tilray Stock Financial Results Q3 2019
Source: Company Filings

Manitoba's revenue actually went back a little on the previous quarter, with the "seasonality" of the hemp industry blamed for this partial decrease. CBD sales are still very small, and not statistically significant enough to move the revenue numbers let alone the TLRY stock price.

However, it was their international sales that received the plaudit from the analysts. Revenues grew more than 500% to US$5.7 million for the quarter and increased in its share of sales to 11% (from 4% in the previous quarter).  The growth was driven by the first export of Tilray cannabis flower to Can Medical Pharma in Germany, adding over $3 million to the quarter!

Canadian LP peer-to-peer valuation analysis
Source: Company Filings

Gross margins saw a minor improvement to 31% from 27% in the previous quarter). Next year, LRY expects gross margins to improve to the mid-30s, getting to mid-40s by the end of 2020. Long-term, the company is aiming for 50% in gross margins (which would put it more in line with its Canadian peers) and the company gave guidance of adjusted EBITDA profitability in the fourth quarter of 2020.

Tilray stock's profitability and runway

Tilray reported a net loss for the quarter of US$35.7 million (compared to a loss of US$18.7 million in the third quarter of 2018).  Management put the increased cash burn down to operating expenses related to expansion and growth, and the expansion of the Manitoba and Natura businesses.

Tilray ended the quarter with a net debt position, given they have approximately US$122 million cash in the bank and US$427 million in convertible debt. Although the debt is not due anytime soon, the fact remains that at the current rate of burn, the company is going to have to raise capital again. Yet, even with all of this debt, management believes it would be through further debt.

We continue to actively explore opportunities for financing and will likely tap the debt market in the next coming quarters. Today, we have over $300 million unsecured assets that we can leverage.

Mark Castaneda, Tilray CFO & Treasurer

The fact remains that they already carry significant debt on the books, and although there might still be assets that could be leveraged, shareholders and investors should certainly question the company taking on even more debt. Something to watch!

Disclaimer: Past performance is not an indicator of future performance.

Is Tilray stock a buy right now?

Tilray operates an "asset Light model" which protects the company as supply quickly catches up to, and then surpasses, demand. Alongside Cronos Group, no one else operates this model. Their strategic focus on the ever-expanding medicinal market is strategic as this is where significant revenue and market share can be won in the short term.

TLRY's global reach (servicing 30% of the of 41 medicinally legal countries) and large, multi-industry, partners like ABInBev and the Authentic Brands Group, means the Tilray stock price has significant upside built into it. However, investors should expect further short-term pressure on the Tilray stock price, as the weight of a capital raising looms large.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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