The meteoric surge higher last year in Tilray's (TLRY) shares put this Canadian marijuana stock on investors' radars, but it hasn't been all good news for shareholders. Its stock price has dropped 75% from its peak of $300 last fall. Can this cannabis company compete with the industry's largest players for sales in Canada's new recreational marijuana market? On Monday, management unveiled its latest quarter financials. Based on the surging sales and mounting losses, the roller-coaster ride in Tilray's shares might not be over anytime soon.
No. 1: Roaring revenue
Canada's medical marijuana sales have taken off since regulators created a licensing system in 2014, but it's Canada's recreational, adult-use market that's most intriguing to investors. Adult-use sales began last October, and in 2019, recreational marijuana revenue could total in the billions of dollars, far outpacing the 770 million Canadian dollars in medical marijuana revenue Deloitte anticipates this year.
Eager to get its fair share of this emerging market, Tilray secured supply contracts for eight Canadian provinces. As a result, revenue jumped 204% year over year to CA$20.9 million in Q4, up from CA$12.9 million in the third quarter, prior to the start of recreational sales. The fourth-quarter performance brought the company's full-year 2018 revenue to CA$56.4 million.
In U.S. dollars, Tilray's full-year revenue was $43.1 million, including $15.5 million in Q4 and $10 million in Q3.
Check out the latest earnings call transcript for Tilray.
No. 2: Production
Previously, Tilray's plans were to increase marijuana production capacity to about 76,000 kilos by the end of 2018 and then grow it to 150,000 kilos over time.
Those targets put Tilray among the second-tier Canadian cannabis companies behind Canopy Growth (CGC 6.16%) and Aurora Cannabis (ACB 5.16%), both of which are expected to have over 500,000 kilos of production capacity over the coming years.
Production forecasts, however, aren't nearly as important as current production growth, because there's no guarantee any of these marijuana companies will ever reach their stated targets.
Tilray sold 2,053 kilograms equivalents in Q4 2018 up from 694 kilos in the same quarter one year ago. Full-year production more than doubled to 6,478 kilos from 3,024 kilos in 2017. Clearly, the company's efforts to boost production are paying off, but there's still a lot of work to do before it can deliver on its peak production forecast.
No. 3: Losses galore
Last summer, Tilray got about 45% of its sales from cannabis oils, its average selling price per gram was $6.21(C$7.98), and its gross margin landed at 43%. In Q4, average net selling prices per gram increased to $7.52 (CA$10.05) from $7.13 (CA$9.12) the year before. For the full year, prices improved to $6.61 (CA$8.59) from $6.52 (CA$8.42) in 2017. The improvement stemmed from growing proportion of sales coming from higher-priced cannabis extracts, such as cannabidiol (CBD) oils. These extracts accounted for 49% of sales last year, up from 20% in 2017.
The uptick in prices wasn't enough to offset a rapid run-up in spending, though. Cannabis companies are plowing big money back into facilities, personnel, marketing, and research and development to gain an edge in this potential $150 billion market and Tilray's no exception.
Gross margin in Q4 tumbled to 20% from 57% year over year. Sales and marketing expenses jumped 94% to $6.3 million and general and administrative expenses catapulted 806% higher to $13.8 million. Stock-based compensation increased to $4.1 million from $34,000, too. Altogether, operating expenses totaled over $26 million, causing Tilray to lose $23 million on an operating basis. After all the accounting puts-and-takes, its net loss last quarter was $31 million, versus a loss of $2.9 million in Q4 2017.
Those kind of losses are enough to make any investor nervous. But the company was able to shore up its balance sheet via a $475 million convertible senior notes offering last October, so its financial situation isn't as dire as the losses suggest. It finished December with about $517 million in cash and short-term investments and only $26 million in short-term liabilities.
Financial flexibility is important because momentum to legalize marijuana is spreading beyond Canada to big markets like Germany and the United States. Additionally, the cannabis market is shifting from dried marijuana flower to value-added consumer goods. Establishing a foothold in these markets isn't going to come cheap, but the addressable revenue opportunity is massive. Every year, about $50 billion is spent on marijuana in the U.S. alone and in 15 years, industry watchers think legal marijuana sales can exceed $200 billion per year worldwide.
To make sure it capitalizes on these global opportunities, Tilray's partnering with Sandoz, a global generic drugmaker owned by Novartis (NVS -0.39%) to distribute cannabis medical products and alcohol Goliath AB InBev (BUD -1.69%) to develop beverages containing marijuana cannabinoids. It's inked a deal to produce cannabis-products for Authentic Brands Group's portfolio, including Juicy Couture, and it recently bought natural foods maker Manitoba Harvest, a global hemp company, to target the North American CBD product market, too.
This flurry of activity doesn't guarantee Tilray will become one of the biggest marijuana stocks, but it keeps it in the hunt. That may be enough to convince investors to buy shares, but ongoing losses suggest it will remain one of the most volatile stocks investors can buy.