Tilray’s (NASDAQ:TLRY) management recently appeared at the Oppenheimer 20th Annual Consumer Growth and E-Commerce Conference. What Tilray’s CEO, Brendan Kennedy, had to say was very interesting for TLRY stock.
A Small Group Will Dominate
Oppenheimer analyst, Rupesh Parikh, who hosted the interview with Kennedy, believes the company has the best management in the industry. Further, Oppenheimer believes the company’s actions have left it poised to reach positive EBITDA by the end of the fourth quarter.
For the record, there are 16 analysts covering Tilray stock. Only two have a “buy” rating on it, while 13, including Parikh, rate it a “hold“, and one analyst believes it’s a sell. The average 12-month target price on the shares is $9.29, versus the stock’s current level of just over $8.
But back to the subject at hand.
Right out of the gate during his interview at the Oppenheimer interview, Tilray’s CEO, Kennedy, asserted that the global cannabis industry would, in the future, look a lot like the beer sector now.
“[O]ver the next decade the industry will grow significantly in country after country around the world and I think ultimately it probably looks something similar to the global beer industry where two or three or four companies control 60% to 75% of market share over the next decade,” Kennedy stated during the June 16 interview.
I’m sure the owners of marijuana stocks aren’t surprised by those comments. Nothing inherently differentiates the cannabis industry from the beer, wine or spirits sectors. People use all of these products to relax and socialize. If that wasn’t true, Constellation Brands (NYSE:STZ) would never have made such a significant investment in Canopy Growth (NYSE:CGC).
“Former {Constellation} CEO Rob Sands, who’s now Executive Chairman, knew that the addition of a fourth revenue stream to complement its beer, wine, and spirits portfolio was a logical extension of its business. As a result, the aggressive entrepreneur first bought a small stake in Canopy in 2017, followed by a $4-billion bet less than a year later, giving it 55% of the business,” I wrote in an October 2019 column.
I quoted Sands as saying, in an October 2019 CNN interview that, “Canopy is Constellation’s arm for participation in the cannabis sector.’”
The question on the mind of every Tilray investor is whether Kennedy will be able to get the company to the promised land. If he’s successful, $8 per share will look like chump change a decade from now.
Business Is Good
Tilray reported healthy revenue growth in the first quarter. Its net revenue was $47.1 million, 126% higher than a year earlier, and, more importantly, 11% higher than in the previous quarter. Although it had an adjusted EBITDA loss of $19.7 million in Q1, its loss was $6.9 million less than analysts’ average estimate.
Although Cantor Fitzgerald analyst Pablo Zuanic said in May that Tilray was losing market share in the Canadian recreational market, Kennedy seemed quite upbeat.
“We were surprised that Q1 in the midst of all of [Covid-19] was our best quarter ever. We knew it was going to be a good quarter, but [were] surprised [by] the positive impact of some of that pantry loading,” Kennedy stated.
“We think that every quarter for the rest of this year will be our best quarter ever and so we’re seeing growth not only in Canada, but in Europe where there is a bit more of a lack of supply than we were expecting.”
Analysts are wondering if Tilray can deliver positive EBITDA by the end of the year. I think the CEO’s comments suggest that’s more than doable.
What Does This Mean for TLRY Stock?
Kennedy believes that Europe will definitely be a strong market for Tilray, with Germany leading the way. He also sees France as an important country for the company.
As for Canada, over the next two to three years years, he thinks a few clear winners will control the industry.
“I also think that the companies that win will see significant revenue growth from consumers migrating from the illicit market to the legal market. And really today, only about 20% of consumers have migrated to the legal market,” Kennedy stated.
“And so, there’s an upside of 4 or 5x as more consumers convert from the illicit market to the legal one and part of the slowness is due to a lack of retail locations for consumers to buy these products.”
In February, I discussed some of the reasons why Canopy Growth delayed its rollout of cannabis-infused drinks. One of the main reasons, I argued, was that Canadian cannabis retailers have been abysmal at launching products.
Now, in fairness to the retailers, a big chunk of the blame lies with the provinces and Health Canada, the country’s food and drug regulator. They’ve moved way too slowly. Until that changes,cannabis products will continue to dribble onto the shelves and online stores across the country.
Ultimately, Kennedy thinks Cannabis 2.0 products, including drinks, edibles, and vapes, will help pull more people into the legal market. That should be excellent news for Tilray.
In addition, as some cannabis companies close up shop due to faulty business models, etc., and more people move from the illicit market to the legal market, Tilray expects its revenue to jump meaningfully.
As I said in May, Tilray is doing all right. However, TLRY stock remains best-suited for aggressive investors who understand its risk.
Over the long-term, I could see it being one of the two to four companies that rule the global cannabis market in a decade. But it won’t reach that point for a long time. In the meantime, the company ought to be really interesting to watch.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.