• Tilray outlined four global opportunities in the cannabis space.
  • The company made a bold prediction about adult-use cannabis legalization in the US and medical cannabis elsewhere.
  • Despite the company’s investment and optimism, the stock price has faced weakness in 2019.

Four opportunities in the cannabis space

Earlier in July, Tilray (TLRY) provided insight into the cannabis sector at the Stifel Cross Sector Insight Conference. The company outlined four potential opportunities in the cannabis space.

  • Global medical
  • Globel CBD and hemp extract
  • Global adult-use cannabis
  • Global hemp food

Bold prediction

Tilray made another bold prediction at the Stifel Cross Sector Insight Conference. CEO Brendan Kennedy predicted that about six or seven countries will see recreational cannabis legalized in the next 12–18 months. Tilray expects about 40–80 countries to legalize medical cannabis over the next two or three years.

Tilray made bold predictions in the past. At a similar investor conference in November 2018, Tilray stated that after the next US presidential election, regardless of the which party wins, the country could move towards cannabis legalization. Tilray predicted that cannabis would be legal in the US by November 2021.

Tilray reiterated its prediction at the conference this month. The company stated that it sees the US legalizing cannabis in the next three years. Tilray thinks that around 90% of retailers will sell some form of cannabis products by the end of 2019.

While the US elections are several months away, a few candidates have chosen marijuana as one of their campaign promises. Bernie Sanders, Cory Booker, Kamala Harris, Cory Gardner, and Elizabeth Warren have shown early signs of support for marijuana legalization at a federal level.

Cannabis as a substitute

Tilray thinks that cannabis serves as a substitute for prescription drugs like painkillers and opioids. The company is actively positioning itself as a medical company. Tilray has partnered with Sandoz—a pharmaceutical company. In Canada and Germany, Tilray partnered with pharmacies to distribute its medical products.

While medical cannabis could be substituted for certain prescription drugs, it has several hurdles to cross. For example, cannabis has a negative perception, which needs to be resolved.

There are still concerns that cannabis products lack scientific backing. For example, the FDA is cautious about cannabis. The FDA stated that “there are many unanswered questions about the science, safety, and quality of products containing CBD.”

The good news is that as certain cannabis products start to get approval from the FDA, the global market will become more receptive to cannabis use as a medical alternative. However, Tilray doesn’t think that cannabis is a substitute for tobacco.

Dismal performance

Tilray has experienced significant weakness in 2019. As of July, the stock has delivered a dismal loss of 38%. While the cannabis sector is experiencing overall weakness, Tilray’s peers have fared better. Canopy Growth has delivered a YTD (year-to-date) return of 26.5%. Canopy Growth stock has been solid despite its weaker-than-expected earnings report and CEO Bruce Linton’s departure. Aurora Cannabis was downgraded by Bank of America last week. The stock has returned 38% YTD.

Weak stock price

Tilray hasn’t delivered on its performance yet. In fiscal 2018, the company reported a loss per share of $0.82, which was almost 63% lower than analysts’ estimates. Tilray also missed its first-quarter bottom line with a net loss per share of $0.32 compared to analysts’ estimate of a loss per share of $0.24.

Tilray has a very low float. In July, only 0.4% of the company’s shares are held by individual investors. Privateer Holdings holds 72.4% of the company’s shares. The market expects dilution and downward pressure on Tilray stock when Privateer offloads its stock in the market.

In June, Tilray and Privateer Holdings entered into an agreement to gradually offload Tilray’s shares over two years. The offloading would temper the effect of dilution on the stock. A two-year period would also give the company time to increase its value, which will offset the negative impact of dilution.

Tilray’s current CEO, Brendan Kennedy, co-founded and served as Privateer Holdings’ CEO. Kennedy is the executive chairman on Privateer Holdings’ board. Given the interconnectedness, the vulnerability from Privateer Holdings doesn’t seem to be a big concern. However, since the stocks are released slowly, dilution will be a key concern for Tilray stock.

Sales performance

Tilray has seen significant revenue growth due to recreational cannabis legalization in Canada. The company reported sequential top-line growth of 48% in the first quarter. The company delivered higher gross margins in the first quarter at 23.4% from 20.2%. Over the long term, the company is targeting gross margins in excess of 50%. Tilray has an adjusted EBITDA margin target in excess of 25% and an operating margin in excess of 20%.

Increasing value

Speaking of increasing value, Tilray is busy. The company has upcoming opportunities in Canada. Cannabis-infused edibles, including beverages, could drive the company’s growth. However, cannabis has to become legal in Canada. Tilray has partnered with AB InBev, the maker of Budweiser, to develop non-alcoholic beverages.

On the medical front, Tilray has ongoing clinical trials in Canada, Australia, the US, and Spain. The clinical trials target pediatric epilepsy, essential tremor, inflammation, HIV and AIDS, post-traumatic stress disorder, glioblastoma, and cancer-related illnesses.

Analysts’ estimates

Over the past few months, analysts’ consensus target price on Tilray has seen a gradual downward revision. The fall indicates bearishness in the consensus sentiment.

Tilray’s Stock Price Is Subdued Despite Global Opportunities

The current consensus target price on Tilray was at $79.3 to be achieved over the next 12 months. At the peak, the consensus target price was $147 in October of 2018. Based on the closing of $43.6 on July 19, the current target price leaves a potential upside of 81.9%.

The consensus rating on the stock in July is a “hold.” Among the 16 analysts, 11 recommended a “hold,” four recommended a “buy,” and one recommended a “sell.”

HEXO has a consensus “buy” rating. Aphria also has a consensus “buy” rating on the stock in July.

Valuations

Over the past year, Tilray has traded at a premium valuation compared to its peers. The company’s valuations have fallen significantly in 2019.

Tilray’s Stock Price Is Subdued Despite Global Opportunities

On July 19, Tilray was trading at a forward EV-to-sales multiple of 12.1x. The company was still trading at a premium to the peer median at 6.0x. A few of Tilray’s peers were also trading at a premium to the peer median including Aurora Cannabis at 13.4x, Cronos Group at 24.9x, and Canopy Growth at 9.9x.

When stocks consistently trade at a premium to the peer median, they are often considered to be better in terms of growth prospects. The stocks have low risk compared to the peer group.

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