Friday, September 10, 2021 8:40:23 AM
Sep. 10, 2021 2:04 AM ET
Summary
• Following their strategic merger with Aphria, TLRY is the largest commercial marijuana company in Canada.
• TLRY is lowering its costs rapidly, something important in the marijuana industry.
• TLRY is well-positioned in the event of federal legalization in the United States, as they have an established distribution channel through their subsidiaries Manitoba Harvest and SweetWater.
Thesis
Tilray (TLRY) is the largest marijuana company in Canada, with operations worldwide, including non-marijuana operations in the United States. The strong Canadian YoY growth, vertical integration, shifts in consumer behavior, and the United States opportunities make TLRY a buy at these levels.
Operations in Canada
As of writing, the entirety of Tilray's recreational marijuana business is conducted in Canada. The Canadian market does pose some unique challenges hindering TLRY's sales, but we think that TLRY will experience more favorable conditions in the future.
Since marijuana has been legalized in Canada, the biggest competition for companies like TLRY has been the illegal market.
It is estimated that despite legalization, "about 40 percent of the cannabis market share in Canada is still held by illegal producers."
This is primarily because illegal operations do not have to go through the same regulations that TLRY is held to, and therefore can offer a cheaper alternative.
The share of the market held by illegal producers is falling. We believe that this trend will continue as more previously nonusers are open to using marijuana. Here is an excerpt from mjbizdaily.com.
https://static.seekingalpha.com/uploads/2021/9/8/53115550-16311524526527414_origin.png
It is clear that as time passes, more people are open to using marijuana. These newbies are not getting their marijuana from an illegal source either.
https://static.seekingalpha.com/uploads/2021/9/8/53115550-1631152526644967_origin.png
The trend is clear. More Canadians are recreationally using marijuana, and fewer people are turning to illegal channels for their supply.
As the leading supplier of legal, recreational cannabis, Tilray is an obvious benefactor of this trend.
Growth in Canada
Covid was harsh on TLRY. They stated that over 600 stores were granted licenses but were not able to open due to the pandemic. However, despite the widespread closure of stores, TLRY was still able to post positive revenue growth on a YoY basis, speaking to the growth of their brand.
We expect their sales and market share to increase once stores open back up and TLRY products become more available.
During the question and answer session of their latest phone call, Irwin Simon shared our sentiment.
Irwin later describes how they plan to leverage their size to keep prices low and the rate of innovation regarding product offerings high to keep the "little guys from nibbling at us."
We believe that TLRY has a lot of potential as Canada exits Covid, and looking at the stock's price action, the market has not realized that.
Cost Reduction
Since the marijuana industry has a relatively low barrier to entry, keeping the cost low and margins high is a must for TLRY.
They are currently working on lowering their cost in several ways.
Strong infrastructure, vertical integration
For one, TLRY controls their cannabis cultivation, processing, and distribution. Control over all aspects of production allows TLRY to enjoy lower production costs.
Strategic Aphria merger
The strategic reverse acquisition of APHA is already showing synergistic results for TLRY.
Their partnership with Aphria has already generated $35 million in realized savings, and over the next 18 months is expected to generate upwards of $80 million in synergies. Considering that their TTM operating expense is $191 million with an operating income of -$68 million, the savings from this merger could be the push that they need to generate net income.
It is working
The results of their cost-saving efforts are already beginning to show up. In 3Q21, their average cost per gram came in at $.90. In their latest earnings call, they revealed that their average cost per gram came in at $.72. The reasoning that they gave for this decrease were "improved yield, potency and cost control efforts."
This 20% reduction in cost per gram, even before the full extent of their synergies are realized, should serve as a green flag for shareholders.
US legalization
Before we address TLRY's position, let us illustrate why the US government may federally legalize marijuana in our lifetime.
Here is data from the Pew Research Center on public opinion regarding marijuana legalization.
https://static.seekingalpha.com/uploads/2021/9/8/53115550-16311465058527179.png
Source: Pew Research
As you can see, public support is growing fast and now controls a solid majority. ~2/3 of people support legalization.
The sentiment is not limited to the general population either. While there is higher support seen among Democrats, both parties favor the legalization of marijuana.
https://static.seekingalpha.com/uploads/2021/9/8/53115550-16311466241542757.png
Source: Pew Research
As time passes, it appears that support will continue to grow, as younger generations view legalization more favorably than older generations.
https://static.seekingalpha.com/uploads/2021/9/8/53115550-16311466866135712.png
Source: Pew Research
The data shows that most people want marijuana legalized, and the majority will likely get stronger as time passes.
Tilray's US position
In their conference call, TLRY stated that with full legalization in the US, they are likely to get $4 billion in revenue by 2024.
This is possible for several reasons.
They have two subsidiaries that operate entirely in the US. Manitoba Harvest, a provider of Hemp-based personal wellness foods, and SweetWater, which they claim is the 11th largest craft brewer in the United States.
Through their subsidiaries, they have experience interacting with the United States market and regulatory pressures. This gives TLRY a unique advantage over marijuana companies that lack a presence in the United States.
Marijuana in the United States is also far more expensive, which could lead to higher margins. For example, the average cost per gram in the United States is $12, whereas TLRY's average selling price per gram in Q4 was only $2.98, according to their latest conference call.
We view their presence in the US and the US market opportunity as a whole as a massive positive for TLRY.
Conclusion
Tilray is the leading marijuana producer in Canada, and its revenue is still growing at double-digit rates YoY. In addition, TLRY stands to benefit from Canada's Covid recovery, a shift in consumer behavior towards legal cannabis suppliers, an increase in the number of cannabis users, and a potential United States legalization. For these reasons, we rate TLRY as bullish and hold a beneficial long position.
Written By: Moonshot Equity Analysis
Growth, Deep Value, Medium-Term Horizon, Long-Term Horizon
Member Since 2021
Active investor. Mainly covers companies with high investor interest. Covers everything except banks. Aspiring startup founder. 6-18 month investment time horizon, will take ticker suggestions.
Disclosure: I/we have a beneficial long position in the shares of TLRY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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