Tilray (TLRY) , one of the most talked about Canadian pot stocks, is adding optimism ahead of its second quarter earnings release after Tuesday's market close.
Shares gained about 1.5% on this morning's open, building back some strength after falling about 40% year to date and a stunning 80% from its peculiar September 2018 short squeeze.
Strong reports from Aurora Cannabis (ACB) and Aphria (APHA) lifted the sector based on Canadian recreational demand. It will be up to Tilray to carry through the trend to the medical and international segments.
For the upcoming report, the Canada-based cannabis company is expected to report a loss of 26 cents per share on $40.3 million in revenue, according to FactSet estimates.
The loss projected represents a widening loss year over year as the company continues to invest in international and medical cannabis expansion. Meanwhile, revenue estimates represent an over 400% jump year over year, per FactSet.
Key to coming in over the bar on these figures is the normalization of the Canadian cannabis market as the company continues to invest in domestic production after being an early entrant into numerous European markets.
"We now believe there could be a supply balance in Canada in the next 18 months to 24 months, as the market finds an equilibrium between supply and demand," CEO Brendan Kennedy said in the company's first quarter earnings call. "We have seen increasingly high demand in the Canadian cannabis market for the highest quality branded cannabis, and have decided to increase our Canadian production and manufacturing footprint by investing $32.6 million across three of our five Canadian facilities."
Progress on the demand dynamics as touted by Aurora remain encouraging and are likely adding enthusiasm for the stated expansionary effort earlier this year.
"Although historically focused on medical cannabis, Tilray has pivoted to recreational cannabis after Canada legalized it nationally in 2018," Morningstar analyst Kristoffer Inton told clients earlier in the summer. "Medical cannabis previously accounted for more than 90% of its sales, but since recreational legalization, medical now accounts for about a third of sales."
Progress on the normalization for supply and demand dynamics as the company continues to pivot to recreational markets at home will likely be key to the stock's trajectory following the release.
"While the Canadian market remains challenged with quality supply, we are confident supply demand dynamics will become more balanced over time as additional production capacity becomes available," Kennedy concluded following the first quarter. "We believe clinical research will help the cannabis industry by fostering mainstream acceptance with the medical community and governments."
A positive update will surely be required.
Ahead of further details, all but one analyst covering the stock since its last earnings release is maintaining a "Hold" rating on the stock, with price targets suggesting moderate upside from current levels.
Expansion and Integration
However, the real differentiators for Tilray are the areas in which it has been an early mover. Namely, international cannabis demand, medical markets, and prominent partnerships.
"Our global growth strategy remains focused on six top-line performance drivers that we expect to generate strong returns as the business continues to grow," Kennedy told analysts earlier this year.
He cited increased production and manufacturing capacity for global and medical demand, quality control, partnerships with distributors and retailers, a diverse product set, expanded global medical portfolio, and industry leading R&D investment as the keys to carrying the lead forward in global cannabis markets.
To further these ends, the company has been quite aggressive in acquiring both companies and land.
In the first quarter, the company acquired hemp manufacturer Manitoba Harvest and licensed cultivator Natura Naturals in order to add to its production capabilities in both THC and CBD products, while partnerships with Novartis (NVS) and Anheuser Busch (BUD) announced last year enhance distribution.
Internationally, the company inked an agreement to purchase 20 hectares of land in Portugal to meet European demand as the market becomes more liberal on cannabis policies. Revenue from the expansion is not expected to impact results until the back half of the year.
While the dynamics on the company's expansion appear prescient given long term forecasts, the short term squeeze on margins could be a lingering issue as SSG&A expense continues to climb and acquisition costs bear down on results.
Further, a focus on recreational markets comes at a far lower margin than medical products, adding to the overhang.
"Our vision has always been to be a global leader in the cannabis market, which is why we are judiciously planning for expansion in two of the largest markets, the United States and Europe," Kennedy commented on the rationale for the added spend. "We believe our strategic global partnerships and acquisitions demonstrate our focus on the diversification of our global opportunities for long-term growth."
Don't Get Too High Too Early
Still, analysts advised caution on the outlook in the near term.
"The recent acceleration in the Canadian adult-use market provides some opportunity here, but the company faces a later start to the Canadian second wave and still faces a lack of regulatory clarity from the FDA around CBD could keep the company from launching its U.S.," Stifel analyst W. Andrew Carter commented on Tuesday. "Tilray's gross margin has been impacted by buying a significant portion of supply on the wholesale market with the company admittedly flat footed regarding the supply/demand dynamics in the industry."
He added that dynamics in Europe and the U.S. remain far murkier than Canadian projections at present, adding a degree of skepticism prior to results.
"Our approach to Tilray is consistent - we believe the slower development of global medical opportunities suggest downside to near-term expectations and could weigh on the stock," he advised. "We believe the costs of achieving growth in the category are likely to outpace Tilray's expectations suggesting downside pressure to Tilray's guidance for an advantaged margin structure."
Carter set a cautious price target at just $38 per share, actually below the day's opening price.
The consensus estimate among analysts releasing research since the company's first quarter release remains in line with Carter's contention.
"In recent quarters, the company has aggressively linked partnerships with leading CPG and pharmaceutical companies and has also laid the groundwork to benefit from the US CBD market," Oppenheimer analyst Rupesh Parikh advised clients. "We look favorably on Tilray's ability to capitalize on the longer term growth opportunities globally, but we believe the combination of a full valuation and the potential for a slower ramp in Canada given supply shortages in an asset-light model limit the potential for outperformance near term, supporting our [Neutral] rating."