This Analyst Has Mixed Feelings About Tilray's Promise To Achieve $4B In Revenue By 2024, Here's Why

Tilray Brands' TLRY stock has plunged nearly 30% year-to-date. However, with the company being clearer regarding its plan to become a $4 billion revenue company by fiscal 2024, as well as explaining that the target is partially affected by the M&A opportunities and cannabis legalization – both in the U.S. and overseas - analysts' views are mixed.

The Analyst

Cantor Fitzgerald's analyst Pablo Zuanic retained a Neutral rating on the company's stock while keeping its price target of $6.15.

The Thesis

Tilray has often noted that what differentiates it from other Canadian LPs is a plan that does not depend on the U.S. cannabis legalization. Interestingly, both Tilray's and Canopy Growth Corp.'s CGC stock, also considered one of the largest Canadian cannabis companies, lost 40% in the last month compared to AdvisorShares Pure Cannabis ETF YOLO, that fell 25% and SPDR S&P 500's SPY, an 8% drop.

Still, Tilray management seems confident that the company will be well-positioned to purchase a multi-state operator (MSO) once U.S. legalization occurs.

However, Zuanic is not so optimistic about this scenario considering that Tilray currently has a roughly $2.5 billion market cap.

"With Tilray's market cap these days below the top 3 MSOs, we wonder if it will indeed be in a position to pull off such a deal," he said. "The longer legalization takes, the more MSOs we would expect to pass TLRY in size."

The analyst even questions the company's potential to enter the U.S. THC market via such a deal.

"The tractiveness of TLRY to CPG/pharma will depend on the moat it can maintain in Canada rec/med and in Europe," in his opinion.

That said, let's look at how the company is currently positioned in the markets where it runs operations.

Canadian Operations

CEO Irwin Simon recently made the bold statement that Tilray will "own Canada."

"It's the largest in Canada today, and it will get bigger," Simon noted during a recent interview with CNBC reporter Frank Holland at Benzinga's Cannabis Capital Conference.

Zuanic said that the recent deal with HEXO Corp. HEXO would significantly boost the company's share within the Canadian market.

"Tilray should be able to recoup market share in Canada over time," the analyst explained in his recent note. The company could even "double share if they eventually acquire HEXO."

Zuanic recognized that Tilray's projection that the company could reach $600 million in revenue by the end of fiscal 2024 from its Canadian operation with $200 million from doubling market share and another $200 million from continued market growth is "not unrealistic."

HEXO announced a strategic partnership with Tilray in March. The deal included a debt financing agreement, under which Tilray agreed to acquire $211 million of senior secured convertible notes that HEXO initially issued to HT Investments MA LLC.

In addition to strengthening the HEXO balance sheet, the partnership also brought together Canada's top two cannabis market share leaders and is expected to create efficiencies of up to CA$50 million ($39.57 million) within two years, which will be shared equally between the two companies.

On the heels of the announced arrangement, Zuanic said the transaction effectively doubles Tilray's market share to 20% for (only) $182 million and the eventual cost of the HEXO float.

"If we assume the combined company can get to 25% rec market share and 20% EBITDA margins at 20x EBITDA by Dec' 2024, the rec piece of Tilray (including HEXO) would be worth CA$3.6Bn or US$2.8Bn," Zuanic said, which is well above the current market cap of Tilray," the analyst explained earlier.

Tilray recently inked a definitive agreement for a commercial and financial partnership with HEXO, giving consent to acquire 100% of the remaining $193 million outstanding principal balance of the senior secured convertible note that the Canadian cannabis operator issued.

International Operations

Earlier this month, Tilray reported its third-quarter financials revealing a 23% YoY increase in net revenue to $152 million and significant growth in international cannabis, with revenue up over 4,000% from the prior year's quarter and a 37% increase in revenue in EMEA when compared to the previous quarter.

Zuanic's analysis of the earnings report suggested that "continued strength in the international business," which accounts for 29% of cannabis sales and probably close to half of the gross profits, was "the main takeaway" from the quarter.

Following its debut in Portugal in early 2021, Tilray finalized its first harvest of medical cannabis grown in Germany in July via its German subsidiary Aphria RX GmbH. That marked the comapny's first medical cannabis harvest under the European Good Manufacturing Practices standard at its state-of-the-art 6,000 square-meter indoor grow facility in Neumünster, Germany.

The company kicked off 2022 by signing a strategic agreement with Canndoc Ltd., a subsidiary of InterCure Ltd. INCR, via its wholly-owned subsidiary Tilray Portugal Unipessoal Lda. to export medical marijuana from Portugal to Israel.

In February, Tilray completed its first sale of medical cannabis in Malta, following the launch of Tilray Medical, a global medical platform that consolidates its medical cannabis brands under one strategy, mission, and vision. Last month, Tilray Medical expanded its offering and launched the first EU GMP medical cannabis oil products in Malta.

In addition to bolstering its medical cannabis product offering in Australia, the company also recently launched a new medical cannabis e-learning platform for healthcare providers. The company's product offering in the country is centered around its whole flower options ranging from balanced 1:1 whole flower (THC 10 CBD 10) including mid-range (17) and high THC (25) varieties of 15g bag GMP-Certified medical cannabis whole flower.

"At the moment, Tilray only operates in the European Rx medical cannabis market, where it sees revenue going from $350Mn - this includes CC Pharma, a distribution entity reaching about 13,000 pharmacies - to $450 million on market momentum growth," Zuanic said.

Opportunities, however, lie in adding depth to its medical business, benefiting from the launch of recreational sales in key markets, entering the OTC CBD segment, and taking advantage of wellness initiatives around hemp, he added.

The US CPG Business

Tilray's Breckenridge Distillery – which was acquired in December - recently celebrated two Double Gold and one Gold medal at the 2022 San Francisco World Spirits Competition, shortly after partnering with local Denver Street artist and muralist Alexandrea Pangburn to release the second edition of the Collectors Art Series, a limited release bottle.

The company made headlines by purchasing the California craft beer brands from WC IPA on Dec. 17, for $5.1 million (CA$6.4 million), in cash and stock.

With the foray into the cannabis craft beer market, Tilray builds upon its existing SweetWater Brewing business, which Aphria Inc. acquired in a $300 million deal prior to merger of the two Canadian cannabis giants.

"Tilray's strength lies in our ability to identify and significantly expand leading CPG lifestyle brands that resonate powerfully with consumers," Simon said earlier. "We see tremendous potential for Breckenridge and our existing Sweetwater brand to complement each other, expanding their respective reach and driving further profitable growth in our beverage alcohol segment."

Zuanic said that in addition to craft beer and spirits, the company "may add other CPG products to the "Tilray Brands" umbrella that are adjacent to cannabis," which would contribute $500 million in revenue fiscal 2024, from $120 million now.

Last but not least, sales and earnings of Manitoba Harvest, a hemp foods brand and a subsidiary of Tilray, seem to have "turned for the better" since the merger with Aphria, Zuanic noted. Besides hemp food, growth potential lies in plant-based powder supplements, herbal teas, cannabinoid beverages and CBD.

One of Manitoba Harvest's latest moves was the introduction of innovative Hemp+ Matcha and Hemp+ Supergreens powders exclusively at 300 plus Whole Foods Market locations nationwide, landing on shelves throughout April 2022.

Price Action

Tilray's shares traded 2.05% higher at $5.21 per share at the time of writing on Friday morning.

Photo: Courtesy of Markus Winkler on Unsplash