Tilray is in purgatory as Congress blocks the legalization of weed. Is it time to buy?
Shares of cannabis supplier Tilray Brands (TLRY)(TSX:TLRY) are down 20% in the past 30 days amid a market sell-off. Longer term, the one-time high-flyer has been dragged down by repeated delays on Capitol Hill as Congress drags its feet. spearheads the federal decriminalization of marijuana in the United States
Is it time to buy, as a bet that the United States will eventually provide an avenue for legal sales of the product?
Purgatory of legalization in the United States
Based in Canada, Tilray produces and markets a variety of cannabis products for the medical and recreational markets. It also sells hemp-based foods through a subsidiary to grocers like Whole Foods, cannabis-related wellness products, and craft alcoholic beverages.
Its main markets are Canada and the United States, although it is also gaining ground in Europe.
Tilray has also been very active on the mergers and acquisitions front. The company acquired fellow cannabis distributor Aphria in May 2021 and recently purchased heavy debt from Hexo (HEXO), which could potentially be converted into a 50% stake.
Tilray has also diversified into alcoholic beverages through acquisitions such as Atlanta-based SweetWater Brewing and Colorado-based Breckenridge Distillery.
The performance of cannabis stocks largely echoed that of the broader market, albeit with more dramatic swings. But stocks have also suffered as legislation to legalize weed at the US federal level languishes in Congress.
Although Tilray’s stock has fallen significantly over the past 30 days, it has fared better than many of its peers. Shares of Hexo (HEXO) (TSX: HEXO), whose subsidiary recently filed for creditor protection, fell 18%, while shares of Canopy Growth (CGC) (TSX: WEED) plunged 31% and Aurora (ACB) (TSX: PBR) 48%. Sundial Growers (SNDL) and Curaleaf (OTCPK:CURLF)(CSE:CURA) performed better, but still saw significant losses, slipping 8% and 15% respectively as of June 23.
Is TLRY a buy?
Tilray’s stock hit a 52-week low on June 16 at $3.02, an 84% drop from the high reached nearly a year earlier. On June 29, 2021, the stock hit a 52-week high of $19.24.
Although Tilray is actively diversifying, a large portion of its revenue still comes from adult-use cannabis sales in Canada. According to Tilray’s third-quarter earnings report, $55 million of the $152 million in reported revenue was generated from cannabis sales, with $44 million attributed to the Canadian adult consumer market.
In addition to announcing 23% year-over-year revenue growth, Tilray also reaffirmed its forecast of reaching $4 billion in annual revenue by the end of the fiscal year. 2024.
Alcoholic beverages have also become increasingly important to the company, contributing $20 million to third-quarter revenue, while wellness products, such as oils and CBD, accounted for an additional $15 million. The company also reported a quarterly net profit of $53 million after posting a heavy loss the previous year.
Even with these bright spots, the potentially massive cannabis market in the United States remains elusive. While a decriminalization bill passed the House in March, it has yet to be voted on by the US Senate. Similarly, the SAFE Banking Act, which would allow cannabis companies to fully participate in the US banking system, was also blocked.
In an interview with CNBC in late April, Tilray CEO Irwin Simon said he believed the company would see $1.5 billion in US sales if cannabis were legalized federally. He added that he saw legalization in Europe happening in “next year or so”.
Another spotlight on Tilray shares was perceived weakness in the Canadian adult-use market due to increased competition and macroeconomic headwinds.
CIBC analysts, in a note released May 1, said that while they thought the company’s growth targets appeared “aggressive”, they also expected “significant growth via mergers and accelerated acquisitions and continued evolution of the business beyond cannabis.”
“We continue to believe that the main catalyst for the stock is U.S. regulatory reform,” CIBC analysts said, adding that in the meantime, “improved profitability may attract more investors institutional”. CIBC maintained its neutral rating on the stock.
Piper Sandler analysts said they were concerned about the company’s momentum in a note dated June 14 and cut their price target to $3 from $6.
“We believe that Tilray stands out from its competitors with its direct access to the EU and its positive EBITDA margins, knowing that a further loss of market share in the Canadian recreational market, weaker than expected beer sales and an unfavorable exchange rate are weighing on fiscal fourth quarter momentum,” said the analysts, who maintained their Neutral rating.
Wall Street analysts, on average, rate Tilray as a Hold. Of the 20 analysts tracked by Seeking Alpha, four rated it a strong buy, 14 a hold and two a sell. SA writers also broadly rated the stock as a Hold.
Seeking Alpha’s quantitative rating system also considered the title a Hold. The company earned an A for reviews and an A- for valuation and an A for growth, as well as a B+ for profitability. However, the quantitative metrics tracker gave the stock a D+ for momentum.
For more on Tilray, see “Tilray Stock: Don’t Even Think About It” by contributor SA JR Research or “Tilray Brands: Almost Good Enough” by contributor SA Wright’s Research.