Canada-based Tilray Inc. (TLRY) is the first cannabis company to be listed on the Nasdaq and so will come under great scrutiny. It priced its initial public offering (IPO) at $17 a share in July and currently trades around $39. The lowest price for the stock was $20 at the beginning of August and it hasn't looked back.
The question now is whether the stock moves higher as Canada moves this fall from a medical-marijuana-only market to one that sells adult-use marijuana. Can Tilray successfully navigate this transition from fully medical to recreational?
In states where a medical cannabis market existed prior to an adult-use market, sales of medical marijuana typically fell once adult use was legalized. Tilray's focus up to now has been on the medical side, with 95% of its sales in this category because those sales were all that were legal in Canada.
Can the company make a successful transition to the adult-use consumer? Both Cowen & Co. and Roth Capital have initiated coverage on Tilray with an outperform and buy rating, respectively. The average price target is $34.57 according to Yahoo Finance. They both seem to think Tilray can adjust to the coming change in Canada.
Cowen & Co. analyst Vivien Azer said she thinks Tilray's medical marijuana sales will contribute considerably less to total company sales from 2019 to 2021, albeit still experiencing roughly 31% growth as more pharmacies come online. Azer said Tilray will shift its sales more toward the adult-use market and international sales.
Matt Karnes, founder of GreenWave Advisors, said it "remains to be seen to what extent the recreational market in Canada would disrupt medical sales."
"As we observe in the U.S., every state that implements recreational use has realized a slowdown in (patient) cardholder growth," Karnes said. "We note a similar dynamic in Canada as the growth rate in registered medical marijuana cardholders has started to level. However, we would not expect as profound an impact as noted in the U.S. given medical marijuana is fully legal in Canada, which would mitigate the fear of 'being on record' as a cannabis user."
Canadians are becoming less shy about admitting to consuming cannabis as legalization comes closer. The Canadian government now believes 4.5 million of its residents had used cannabis monthly and 6.3 million had consumed it within the past year. That pushes the consuming population past that of the U.S., probably due to the lack of easy access to legal cannabis in the U.S.
While the focus is on the adult use market, Cowen & Co. has estimated that the medical market still will generate $2 billion in sales by 2025, which is a very sizable market.
It looks like there will be plenty of customers for the key players to fight over. Canopy Growth Corp. (CGC) is the leader, signing with eight Canadian provinces to supply cannabis, while Tilray and Aphria Inc. (APHQF) each have signed with five. Aurora Cannabis Inc. (ACBFF) has deals with three provinces. Hydropothecary Corp. (HYYDF) follows with two provinces, while Cronos Group Inc. (CRON) has one.
Ontario just announced on Tuesday that it has inked agreements with 26 licensed producers to provide product for sales through the online Ontario Cannabis Store. Tilray, Canopy Growth, Aurora Cannabis and Aphria are all on the list. Tilray has made agreements with Quebec, British Columbia, Manitoba, Northwest Territories and the Yukon.
Product Diversity Becomes a Must
Tilray will be going toe to toe with Canopy Growth with its portfolio of exclusively licensed brands. Each has brands addressing various categories. Canopy Growth has its No. 1 product in Tweed while Tilray doesn't really have a flagship brand just yet. It does have Marley Natural, the official brand of Bob Marley, a well-recognized name. Canopy Growth's similar brand is Leafs by Snoop, the product authorized to use Snoop Dogg's name.
When it comes to women's products, Tilray has the planned Irisa line. It isn't out yet but is conceived as product focused on health and wellness. Women have become a larger category for cannabis companies and it behooves each company to have a group of products marketed toward women. Canopy Growth's line already exists and is called Foria; it also centers on wellness but has a distinct focus on women's sexual pleasure.
Tilray has a variety of high-potency products such as the Wallop edibles and the Headlights concentrates. Goodship is an edible brand that is well-known and popular in the U.S. market but untested in Canada. Price-sensitive consumers will be drawn to the Dutchy and Grail products. Grail is known for its vape and concentrates.
Canopy Growth's deal with Organa Brands will position it well for the vape category as this private company has done more than $100 million in sales a year and is a customer favorite. It will provide tough competition for Tilray in the vape category.
While Tilray is ready to pull the trigger on edible and vape products, Canada will not allow these types of cannabis products at the beginning of adult legal sales. Ultimately, though, Tilray should end up capitalizing on each of these categories.
Leafly: Tilray's Secret Weapon
One reason that Cowen & Co.'s Azer thinks Tilray will be successful is that it has access to the data from cannabis website Leafly through its partnership with Privateer, its original investor prior to going public. For 10 years Leafly has been reviewing cannabis strains and tapping into consumer preferences as they embark on product searches. All Tilray needs to do is ask Leafly what consumers are looking for and then deliver a product to match those needs. None of the other cannabis companies in Canada has this type of access.
Medical Market Offers an Edge
As the market matures and more medical conditions are found to be helped by cannabis, Tilray's expertise in the area could come back to boost the company in big way. Unlike in the U.S., doctors in Canada seem to accept the use of cannabis as a medical treatment. As GreenWave's Karnes notes, "With a medical card, the product offerings are generally covered by insurance, which would incent customers to opt in to the nation's medicinal use program."
It seems Tilray is in the sweet spot of capitalizing on the medical marijuana market continuing to grow and attract new patients while also meeting the demands of the recreational consumer base.
At the time of publication, Borchardt had no positions in the stocks mentioned.