When The Global Cannabis Shake-out Comes, Will Tilray Still Be A Leader?
Tilray (NASDAQ:TLRY) CFO Mark Castaneda believes “only three or four large players†will control 80% of the global cannabis market with thousands of companies fighting for the remaining 20% market share. So, you can forget about the global cannabis market benefiting lots of different companies.
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The question owners of TLRY stock have got to ask themselves at this point is whether the company has the right stuff to be one of the three or four companies controlling the global cannabis market or will it be relegated to a secondary role within the industry?
Worldwide legal spending is forecast to be $40.6 billion in 2024, nearly three time the $14.9 billion estimated to be spent this year, according to Arcview Market Research and cannabis industry analysis firm BDS Analytics, which released its annual “State of the Legal Cannabis Markets†report on Thursday.
It Doesn’t Stand a Chance
I’m going to assume that Canopy Growth (NYSE:CGC) is sure to be one of those four major players in the global cannabis market.
With its tentative $3.4 billion deal to buy Acreage Holdings (OTCMKTS:ACRGF) approved by both companies’ shareholders, the fact that Tilray CEO Brendan Kennedy believes the U.S. federal government will legalize cannabis within three years suggests Canopy is getting one of the biggest U.S. producers at a very reasonable price.
That leaves three other companies.
Most investors would assume the winners to be listed in Canada or the U.S. I would tend to agree although you never know what the future will bring.
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Currently, TLRY is the fourth-largest Canadian cannabis stock with a market cap of $4.4 billion, $900 million behind Cronos Group (NASDAQ:CRON) in the third position and $3.3 billion behind Aurora Cannabis (NYSE:ACB) in the second spot.
This doesn’t even take into consideration Aphria (NYSE:APHA) or Hexo (NYSEAmerican:HEXO) which are in fourth and fifth position by market cap, respectively.
Of the top five, my favorites are Canopy, Cronos Group and Hexo with Aurora moving higher by the day and Tilray a distant fifth.
Logic suggests that a couple of the four big players will come from outside North America. After all, it’s a big world out there. Also, a few will likely be U.S. companies that are currently listed in Canada or privately held. One of those could be Acreage, which leaves just one other company to rule the world.
At the moment, Curaleaf Holdings (OTCMKTS:CURLF) is the front runner.
Operating in 12 states, the vertically integrated cannabis company is growing very quickly. In the March-ended first quarter, Curaleaf’s revenue grew 288% year over year and 10% on a sequential basis to $35.3 million. By comparison, Tilray had first-quarter revenue of $23 million, 195% higher year over year.
While it’s still early in the game, Curaleaf is proving that the American cannabis players are building substantial businesses despite the fact the U.S. market is an incredibly fractured one where some states are legal, and others aren’t.
Therefore, let’s say Canopy, Curaleaf, a cannabis company outside North America, and one more North American company make up the four that control 80% of the global cannabis market share.
Is Tilray a better bet than Aurora, Cronos Group, or Hexo? That’s debatable.
It Will Be in the Top Four
Although I’m skeptical that Tilray is one of the four cannabis companies that will rule the cannabis world, I do like some of its acquisitions.
Take Manitoba Harvest.
Tilray paid $316 million for the Manitoba-based producer of hemp-based products that sell in Costco (NASDAQ:COST) and Walmart (NYSE:WMT) and approximately 13,000 other points of sale in the U.S.
Manitoba Harvest’s 2018 revenues were CAD $94 million. Profitable, the acquisition added to Tilray’s bottom line from day one, providing investors with an immediate return on invested capital, not to mention an improved profit-and-loss statement.
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While it’s not a flashy deal, Manitoba Harvest participates in one of the hottest markets (CBD-infused foods) in North America. As consumers realize that hemp-based products containing CBD can be just as effective as cannabis-based CBD products, Manitoba Harvest’s business will see considerable growth.
By diversifying its revenue streams, Tilray’s CEO is laying the groundwork for a business that can compete in any economic climate.
On June 10, Tilray struck a deal with Privateer Holdings, its largest shareholder with 77% of the outstanding stock, that will see the cannabis hedge fund gradually sell its stake to institutional investors over the next two years, removing a significant headwind to Tilray’s stock moving higher.
“Privateer is giving Tilray a lot of operational flexibility and obviously believes in long-term value of this business and is not pushing to sell its shares as soon as possible, so it’s kind of mutually beneficial, this transaction, for both parties,†Tilray Chief Financial Officer Mark Castaneda said in an interview.
Now that short sellers have been effectively neutered with this transaction, Kennedy can worry about growing Tilray’s business rather than worrying about the TLRY stock price.
That’s excellent news for Tilray shareholders.
Is it enough to make it one of the front runners to rule the global cannabis market? No, it’s not, but it does improve Tilray’s chances slightly.
Bottom Line on TLRY Stock
It seems that all of the big cannabis companies have a few selling points that make them attractive, making it very difficult to handicap this race.
Personally, I’d say Tilray won’t be one of the handful of companies to rule the cannabis world, but we’re still several years from crowning any winners.
Until then, we’re all just speculating.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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