The world of cannabis is changing rapidly. After decades of anti-marijuana restrictions and criticism, the flower is getting a fair look as countries worldwide reconsider its legality and potential medical benefits.
This shift has already happened nationally in Canada, where the country has federally legalized the drug and an estimated $10 billion market has sprung up.
As a result of decades of prohibition that drove marijuana consumption underground, only 54% of the Canadian market is currently served by the legal cannabis industry, Tilray (TLRY), the Leamington, Ontario, cannabis producer.
In the U.S., cannabis sales are expected to top $35 billion this year, despite being legal in only 18 states and the District of Columbia. The cannabis market is expected to reach $61 billion in 2026, according to industry watcher BDSA Analytics.
Last week, the U.S. House of Representatives took a step toward federal legalization, passing the Marijuana Opportunity Reinvestment and Expungement, or More, Act, which would remove cannabis from the list of drugs regulated by the Controlled Substances Act.
The bill, which passed the full House by a 220-204 vote, now heads to the Democratic-Party-controlled Senate, where it had been defeated after passing a House vote in December 2020.
Amid all this change, Tilray has a plan to become the biggest cannabis player in the game, with $4 billion in revenue by 2024. But the road to that annual revenue has a lot of, well, potholes that could hinder those plans.
Tilray's Road to $4 Billion Goes Through Europe
How does Tilray plan to reach $4 billion in annual revenue in two years when it is expected to reach revenue of $639 million this year (according to analysts polled by FactSet)?
For the most part, Tilray's growth strategy lies outside of Canada and being a first mover in Europe.
"We have invested in our infrastructure in Europe. And as a result, Tilray is uniquely positioned as the only company on the Continent with two EU [good-manufacturing-practice] facilities, located in Portugal and Germany," Denise Menikheim Faltischek, Tilray's head of international and chief strategy officer, said on the company's earnings conference call this week.
"Our German facility also remains the only facility producing medical cannabis in Germany today."
Germany is the largest medical cannabis market in Europe and Tilray is the market leader there with a 20% share, according to the company.
And it is expected to be one of the biggest adult-use countries, if and when the German government approves the drug.
Bullish on the Continent
Legalization efforts have been put on the back burner in recent weeks following Russia's invasion of Ukraine. But despite the political unrest, Tilray remains bullish on the European market.
"In fact, we think all of Europe could legalize medical cannabis within the next few years or sooner, with certain countries legalizing adult-use thereafter," Menikheim Faltischek said.
Tilray is already a top mover elsewhere on the Continent.
In Portugal, where cannabis is decriminalized, the company is the only approved medical cannabis product provider. Recreational use is still illegal, but there is some momentum for that to change, according to Benzinga.
In Luxembourg, the company is the exclusive supplier for the country's medical cannabis program. Luxembourg, a country with a similar population to Washington D.C., became the first European country to legalize growing and using cannabis
Tilray has a local partner in Switzerland that distributes its cannabidiol medical-extract products. Cannabis is banned in Switzerland, but minor possession was decriminalized in 2012.
And in France Tilray has been selected as one of four suppliers in a two-year pilot experiment for medical cannabis featuring 3,000 patients. Cannabis is illegal in France, but the pilot program could lead to a softer stance on the drug in the country.
Tilray's Third Quarter
Tilray shares earlier this week popped following the earnings report, but the subsequent sessions haven't been as kind to the company.
For the fiscal third quarter ended Feb. 28 Tilray reported net income of $43.2 million, or 9 cents a share, against a net loss of $273.5 million, or $1.03 a share, in the year-earlier quarter.
Tilray generated revenue of $151.9 million, up 23% from $123.9 million a year ago.
Analysts polled by FactSet were expecting the company to report a net loss of 8 cents a share on revenue of $156.2 million.
Tilray reported a second consecutive quarter of earnings, Cowen analyst Vivien Azer noted.
Still, she said, for Canada "we remain cautious of a U-shaped market share recovery in the near term and believe it will take more than another quarter for trends to improve."
The market remains oversaturated, with 800 licensed providers and 3,200 retail stores, and pricing is under pressure, Azer said. The "competitive environment remains difficult," she said.
"To be sure, brand rationalization and a return to in-store purchasing post-Covid will help, as having fewer brands facilitates and improves budtender education, which in turn increases brand awareness and performance."
The investment firm expressed concern about an Ebitda margin that narrowed 2.2 percentage points sequentially to 6.6%, missing the consensus estimate of 7.7%. At the same time, she said, given the price drops, "gross margin was surprisingly resilient."
Cowen maintained an outperform rating and $23 price target on Tilray.
