TLRY - Tilray Brands: More Than A Cannabis Stock

Summary

• Cannabis may not be legalized in the U.S. in the near future.
• Tilray Brands, Inc. is more than a cannabis legalization play since it is growing its beer and spirits business.
• Tilray Brands’ existing distribution structure is a major asset in case cannabis is legalized.
• Tilray Brands is better positioned than MSOs to capitalize on cannabis legalization.
• Tilray Brands, Inc. stock’s current price is an attractive opportunity for long-term investors.

While a potential cannabis federal legalization may take longer time than expected, Tilray Brands, Inc. ( TLRY ) stands in a strong position as it awaits this legalization that would allow the company to secure a substantial share in the global cannabis market. Although such a legalization is by no means guaranteed, TLRY is doing tremendous efforts to grow its beer and spirits business in the U.S. as it aims to become a diversified cannabis lifestyle and consumer packaged goods company. By increasing its presence in the U.S. market, I believe TLRY is well-positioned to benefit from federal legalization thanks to its impressive portfolio of cannabis products as well as its opportunity to take a 21% stake in MedMen Enterprises Inc. ( MMNFF ).

As one of the few public cannabis companies, TLRY could capitalize on its existing supply chain networks, ability to raise capital, and international presence to gain market share in the U.S. Currently, TLRY is down 54% over the past year. The stock is approaching levels last seen at the start of the pandemic, when TLRY dropped to an all-time low of $2.43. Considering its beaten-down stock price and its global presence in this growing sector, I believe TLRY stock is a buy.

Experience in the Canadian Market

Considered to be a global leader in the cannabis industry, TLRY has been expanding from its headquarters in Canada since the country legalized cannabis in 2018. TLRY brought several well-known brands under its umbrella, allowing it to become one of the largest cannabis companies in the world based on market share. In this way, Tilray Brands, Inc. has been able to dominate the highly competitive Canadian cannabis market and secure a share of the global market through its medical cannabis operations in Europe.

As part of its expansion, TLRY previously entered into an agreement with Canadian cannabis leader HEXO Corp. ( HEXO ) which allowed TLRY to acquire a $173.7 million convertible note from HT Investments MA LLC for $155 million. If TLRY exercises the option to convert this note, the company would hold a 48% stake in Hexo.

HEXO is also considered a major player in Canada’s Cannabis market. The company specializes in consumer packaged cannabis goods and serves the Canadian global market through a portfolio of brands. HEXO aims to become Canada’s first operating cash flow positive cannabis company and ranks itself as the Canadian leader in flower, pre-rolls, flower, oils, capsules, and beverages. It's worth noting that TLRY is ranked only second to HEXO in these categories and their combined capabilities would be a formidable force in the market.

The Canadian cannabis market is more mature than the U.S. market which has yet to fully embrace cannabis for recreational use. TLRY has a multi-continent distribution network and scalable operational structure as well as established cultivation, processing, and manufacturing facilities, which allow it to focus on building out its individual brands. This gives TLRY a running start as it prepares to penetrate the U.S. market once cannabis becomes federally legal.

Penetrating the U.S. Market

On this note, the main catalyst for Tilray Brands, Inc. and other cannabis stocks is the U.S. legalization of cannabis. Over the past months, the cannabis industry has witnessed several runs as the Biden administration showed interest in legalizing cannabis. Most notably, Biden pardoned thousands of people convicted of marijuana possession in federal court - leading many pundits to believe that federal legalization could be approaching.

Biden has also shared that the federal government will review marijuana’s legal classification, which is a promising sign. Currently, cannabis is a schedule 1 substance, which puts it on par with heroin, LSD, and ecstasy, thus classifying it as a highly dangerous drug with no acceptable medical uses. Despite this, cannabis has been legalized across 37 states for medicinal use and across 21 states for recreational use.

Legalization on the federal level would spur more innovation across the U.S. cannabis market and likely result in more consumers as well. A recent Gallup poll found that the use of cannabis in the U.S. is at an all-time high. This poll showed that 16% of those surveyed smoked marijuana - representing the highest percentage since Gallup began asking this question in 2013.

Although the consumption of cannabis products has grown tremendously, federal legalization would attract a new demographic of consumers. There are currently more than 2 million employees working for the federal government, as such they are prohibited from using cannabis products. Employers whose regulations forbid their employees from using cannabis might also see a shift as they align their policies with the federal government’s. Not to mention the potential market across the 29 states which have not yet legalized recreational marijuana use. If the federal government makes the move towards legalization, there is no requirement for states to follow suit, but this decision could clear the way for many states to choose legalization.

This is an incredible opportunity for marijuana companies which could see much wider adoption of their products. As is, there are very few public cannabis companies in the USA and TLRY’s position as a public entity will allow it to raise capital more quickly as it expands in accordance with this new legislation.

As this occurs, I am confident TLRY is best positioned to gain a larger share of the market. This is largely due to TLRY’s chances of acquiring a 21% stake in major US cannabis retailer MedMen Enterprises Inc. Thanks to TLRY’s acquisition of the majority of MedMen’s senior secured convertible notes held by certain funds affiliated with Gotham Green Partners, LLC, TLRY is in a unique position to enter the US market with a running start.

Although this stake provides TLRY with limited access to the U.S. market, TLRY is in a prime position to utilize MedMen’s market insights and information to streamline its offerings in the U.S. market once it is allowed to offer its products.

Additionally, acquiring an ownership stake in a major U.S. multistate operation ("MSO") with a solid brand would allow TLRY to pursue opportunities for commercial arrangements or JVs. As a result, TLRY would be able to expand its presence in the U.S. market should cannabis be legalized at the federal level in the U.S. However, the potential for a federal legalization could take more than anticipated as it is not on the current majority-GOP House of Representatives’ agenda in the meantime - further limiting Canadian LPs like TLRY from operating in the U.S. market.

Expanding In The Alcohol Industry

Despite this, I believe TLRY is well-positioned to witness success in the U.S. market once cannabis is legalized thanks to its ongoing alcohol and edibles brands in the U.S. which are highly recognized among consumers. TLRY’s brands include SweetWater Brewery, Breckenridge Distillery, Green Flash Brewing Co., and Alpine Beer Company who are well-regarded for their premium bourbon and beers. With that in mind, TLRY is growing this business as it intends to become a diversified cannabis lifestyle and consumer packaged goods company.

Back in November, TLRY acquired Montauk Brewing Company - the fastest growing craft beer brand and number one craft brewer in Metro New York. This acquisition allows TLRY to capitalize on Montauk’s concentrated presence in the Northeast to further increase its brand recognition once it is able to offer its cannabis products in the U.S. Additionally, acquiring Montauk provides TLRY with the opportunity to drive in more revenues thanks to Montauk’s distribution across top national retailers and convenience stores like Target, Walmart, Whole Foods, and Costco.

Meanwhile, TLRY is already working to expand Montauk’s presence in additional markets by leveraging SweetWater’s distribution infrastructure to introduce Montauk’s products in a number of key national markets including California, Georgia, and Florida. As TLRY is working to pivot on its beer and spirits business in the U.S., I believe TLRY is well-positioned to capitalize on federal cannabis legalization once enacted since it could leverage its brands’ popularity in offering CBD-infused beers and spirits.

As well as growing its brand recognition in the U.S., TLRY’s alcohol business provides the company with solid infrastructure in anticipation of its entry into the U.S. market. This infrastructure includes these brands’ distribution system which is a pivotal matter for cannabis businesses. Since TLRY appears to be well-prepared for the anticipated cannabis federal legalization, I am sure TLRY would dominate the U.S. market thanks to its strong brands and impressive portfolio of cannabis products.

Competition With U.S. MSOs

Since cannabis remains federally prohibited, U.S. companies are only able to operate in a limited number of states where cannabis is legal in some way. Based on this, I believe Canadian companies are more prepared for a potential cannabis legalization at the federal level as they have the required infrastructure and distribution capabilities to scale their production across the border.

The federal prohibition on cannabis has also provided Canadian Licensed Producers with a competitive advantage as US companies operating in this industry are unable to access basic financial services to grow their businesses. Through this lack of access to financial services, U.S. cannabis companies are greatly affected by being unable to borrow money, list on major U.S. exchanges, or attract institutional investors due to risks related to holding assets related to cannabis.

Meanwhile, Canadian LPs are able to access such services since they do not sell cannabis in the U.S. which allows them to list on major exchanges like NASDAQ or NYSE. As a result, Canadian LPs are able to successfully raise funds through stock offerings or receiving investments from institutions. With that in mind, TLRY was able to raise $129 million through an ATM offering where it issued 32.5 million shares. Through these funds, TLRY purchased $50 million of its convertible notes maturing in 2023 at a $1 million discount while saving $2.5 million in interest costs. In this way, TLRY is better positioned to fund a potential expansion in the U.S. than U.S. businesses, given its bigger market in Canada and the EU.

To further elaborate, CLS Holdings USA, Inc. ( CLSH ) is a Nevada-based cannabis company that holds the largest market share in Nevada. When compared to TLRY, CLSH is in a much weaker position to expand its footprint in the U.S. when cannabis is legalized federally as it lacks the finances to fund such expansion. In Q2, CLSH reported $808.5 thousand in cash and cash equivalents. On the other hand, TLRY has more than $433 million in cash which would better facilitate a potential expansion in the U.S. Moreover, TLRY’s potential ownership stake in MedMen would allow it to have operations in a number of lucrative markets including Las Vegas, California, and New York.

In addition to expanding in the U.S., TLRY already has a solid network of distributors that could be utilized in sending its products across the borders in case cannabis is legalized at the federal level. In Canada, TLRY is partnered with the first national sales broker for adult-use cannabis Great North Distributors, Inc. to distribute its portfolio of cannabis products across the Canadian market. This partnership has allowed TLRY to hold its current position as a leading cannabis business in Canada thanks to Great North’s extensive network of partners. By partnering with such a major distributor in Canada, I am sure TLRY would not face issues in securing deals with other major distributors in the U.S. once it is permitted to offer its products in the nation. In light of its financial and distribution capabilities, I am bullish TLRY would be better positioned for growth in the U.S. market than local businesses in case cannabis becomes federally legal.

Competition With Canadian LPs

In terms of its valuation, TLRY presents a more compelling investment than its main competitors - namely Canopy Growth Corporation ( CGC ). In Q2, TLRY reported $144.1 million in revenues including $66.6 million from cannabis revenues - before deducting cannabis excise tax. Meanwhile, CGC reported total revenues of C$130.3 million and C$62.8 million from its cannabis operations - amounting to $97.5 million and $47 million respectively at the time of writing.

In terms of debt, TLRY is in a better position since it only has $152.1 million in long-term debt. On the other hand, CGC has C$1 billion in long-term debt which would be the equivalent to $922.5 million at the current CAD/USD price. In light of this, I believe TLRY would be the better investment when looking to invest in the cannabis sector as the company’s solid financial position and revenues would allow it to pay off its debt without diluting its shareholders’ value.

At the same time, I am confident TLRY’s prospects in case of a cannabis federal legalization are much better than CGC. Currently, cannabis is legal for recreational use in 21 states and D.C. where nearly 160 million Americans live according to the 2020 census. Meanwhile, a referendum in Oklahoma on recreational cannabis will be the subject of a special election in March which would add an additional population of nearly 4 million into the mix. Considering the potential size of the American market if cannabis is federally legalized, I am bullish TLRY would become a leader in this market thanks to its impressive portfolio of products.

Risks

As is the case with any investment, Tilray Brands, Inc. has its own risks that investors should be wary of before entering a position. The main risk facing TLRY as well as other cannabis companies is the federal legalization of cannabis in the U.S. If cannabis remains a federally illegal substance, TLRY and other cannabis stocks would lose much value since they will not be able to enter into such a lucrative market.

Meanwhile, since most of TLRY’s operations are outside the U.S., the company is largely affected by the exchange rates of EUR and CAD against the USD. With that in mind, TLRY shared in its Q2 earnings call that its QOQ decline in revenues was mainly due to the USD’s strength relative to CAD and EUR. While the company reported $144.1 million, TLRY’s revenues on a constant currency basis was $157.6 million which is a slight increase from Q1 where the company reported $153.2 million.

Additionally, TLRY has been burning cash ever since its inception to fund its growth initiatives. However, Tilray Brands, Inc. is currently working to trim its costs and projects its adjusted EBITDA for 2023 to between $70 million and $80 million. If TLRY achieves this feat, it would be a significant improvement from its reported adjusted EBITDA of $48 million in 2022.

Conclusion

Although a federal cannabis legalization may take more time, I believe Tilray Brands, Inc. is better-positioned to realize its promised potential compared to other Canadian LPs. With that in mind, TLRY has an impressive portfolio of cannabis products for medical and recreational use. At the same time, TLRY is well-prepared for that legalization through its potential ownership stake in MedMen, which provides the company with exposure to the U.S. market in many lucrative states including California and New York.

Meanwhile, Tilray Brands, Inc. is pivoting to its vision of becoming a diversified cannabis lifestyle and consumer packaged goods company in preparation for legalization as its acquired beer and spirits brands provide it with relationships and distribution capabilities in the U.S. With more than $433 million in cash, I believe Tilray Brands, Inc. will continue acquiring existing breweries as a safety blanket in case cannabis legalization takes more than anticipated. For these reasons, I am bullish. Tilray Brands, Inc. is in a prime position to become an industry leader in the U.S. market once cannabis is federally legalized.

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