Summary
- Tilray Brands faces a shareholder lawsuit from the Aphria merger.
- The Canadian cannabis company still fails to generate revenue growth over a year after the merger closed.
- The best growth opportunity is Germany, and the recreational cannabis market might not launch until 2025.
- The stock is far too expensive, trading at 30x FY23 EBITDA targets.
Those following the Canadian cannabis market are probably surprised to see that Tilray Brands ( TLRY ) now trades below $4 and isn't even attractively priced. The Aphria deal offered so much promise to the shareholders that were burned following the original rally above $200, yet the numbers never added up, and now the company faces a shareholder lawsuit . My investment thesis remains highly negative on the Canadian cannabis company that has generally failed to reach the promises of multiple management teams.
Germany Opportunity
While all cannabis stocks have fallen this last year, Tilray has probably hit investors the hardest. The merger with Aphria last year was supposed to create a global cannabis leader, yet the combined company has generally failed to reach any financial targets.
CEO Irwin Simon proudly championed a goal of reaching $4 billion in annual cannabis sales, yet Tilray struggles to even grow off a quarterly revenue base in the $150 million range. The larger U.S. cannabis multi-state operators (MSOs) have all flown past the size of Tilray with Curaleaf ( CURLF ) and Trulieve Cannabis ( TCNNF ) both targeting 2023 revenues around double the amount of Tilray with current analyst targets at just $783 million.
As no surprise to readers, the Canadian cannabis opportunity never turned into a gold mine, with too much money chasing a cannabis market the size of California. The promise was always for European and global sales that haven't materialized.
The last quarter highlighted the international promise and the problems facing the business all along. Tilray reported FQ4 international revenue of $14.1 million versus only $4.6 million last year while total cannabis sales were actually down fractionally to $53.3 million despite not even including a full quarter of FQ4 results from Tilray due to the merger.
Tilray has always appeared incapable of juggling a complex business focused on selling cannabis around the world, a distribution business focused on Germany, a wellness business in the U.S. and a beverage alcohol business. As with the cannabis sales last quarter, one bucket rises (international cannabis) and another bucket falls (Canadian cannabis).
The end result is always a business spinning their wheels while the combined Tilray and Aphria completely miss out on the booming cannabis business in the U.S. for the last few years. The Germany market offers a lot of promise, but Tilray has to execute against the likes of Curaleaf and other domestic suppliers popping up in a country likely to favor the local producers over a Canadian company.
In the last quarter, Tilray claimed a 20% market share in medical cannabis in Germany. The large European country definitely has the will to launch recreational cannabis, but challenges remain for figuring out the actual rules.
As with most countries, the biggest issue is whether Germany will allow imports for recreational cannabis. A lot of the Canadian cannabis players originally built large production facilities in Canada expecting to provide cannabis to the rest of the world, but the world has never shown much willingness to approve such a scenario outside of limited medical cannabis not warranting large local production facilities.
The major debate now is whether Germany might allow EU production to feed the recreational market or whether local production is required with an actual launch date not until as late as 2025 with a requirement for local production. Either way, Tilray appears on the outside of any major market opportunity, with a preference for local companies and EU laws likely requiring the market to start without imports.
Cantor Fitzgerald has estimated the Germany market will reach a market size in excess of $12 billion . The country has 84 million people, with 69 million of potential legal age, and assuming $150 per capita spend, the market would jump to a sizable $12.6 billion.
The problem is that analyst Pablo Zuanic forecasts the market won't launch until 2025 (nearly three years away) and Tilray has no recreational cannabis license yet. The company probably has the inside track to obtaining a production license already being one of the three approved local medical cannabis producers, but the current program has approved over 100 importers.
In addition, Curaleaf recently bought a 55% stake in Four20Pharma providing the U.S. MSO a similar inside track to a license for growing domestic cannabis in Germany. Throw in Aurora Cannabis ( ACB ) and the market already starts getting crowded with North American producers.
No Floor
The same investment thesis remains the problem for Tilray. The stock still has a valuation of $2.2 billion now and the actual valuable cannabis/beverage revenue base sits at around $76.1 million based on FQ4 numbers. Even throwing in the wellness business, Tilray only has a quarterly revenue base of $92.3 million.
Too many investors have constantly looked past the virtually worthless distribution business, with $61.2 million of revenues in the last quarter. These revenues hardly offer 10% gross margins and should be excluded from any valuation analysis of Tilray.
In such a scenario, the Canadian cannabis company only has a revenue base of $370 million. The stock still trades at 6x cannabis revenues, which is a large premium to U.S. MSOs trading around 2x sales targets.
Tilray only forecasts $70 to $80 million in FY23 adjusted EBITDA highlighting the above issues of the company generating too much of corporate revenues from the distribution business and being spread too thin around the globe. The company has very low margins, with an adjusted EBITDA margin target of just ~10%.
The stock trades at nearly 30x these forward EBITDA targets. For investors still confused by the revenue issues, these EBITDA multiples should highlight the problem with the stock even down at just $3.50.
Takeaway
The key investor takeaway is that Tilray continues to struggle and Germany appears the only major growth vehicle over the next few years, and the company doesn't technically even have a license for recreational cannabis there. The Canadian cannabis company doesn't offer a growth path and investors should avoid the overpriced stock where shareholders are set to sue the company.
For further details see:
Tilray Brands: No One Is Happy