Multinational cannabis cultivator Tilray (TLRY) brands itself as a marijuana evangelist across multiple domains, participating in 10 different medical-use clinical trials across seven research institutions in the U.S. and Canada as part of an ambitious plan to push forward the overall public legitimacy of cannabis. While it is difficult to say whether the company will be able to expand the size of its target market over time by working to sanitize the image of both recreational and medicinal cannabis, it is likely that these efforts will make the company more formidable in the long term thanks to the broad-based collaborations and beneficial networking effects they're bringing about.
But with yearly revenue of only $179.5 million, profitability still a distant goal, and mounting debts looming, will Tilray's plan for growth come to fruition in time, or will its need for short-term survival eclipse its ambitions?
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Production cuts may stymie growth while Tilray bets big on the European market
Tilray's recent earnings reports have been favorable, with year-over-year quarterly revenue growth exceeding 119%, despite a profit margin of negative 265% and only $194 million in cash against $509 million in debt. The company's lack of profitability will be a major concern for investors if it runs out of cash to finance its ongoing operations, never mind its plans for future expansion.
Given this, Tilray has taken dramatic steps to stabilize its cash flow issues, including closing down numerous cultivation facilities in Canada. However, some of these closures may net the company less than $10 million in savings per year, making them small pieces of the company's much larger profitability puzzle. While they haven't announced any additional cuts to production facilities, research projects, or other operations, management aims to have positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2020. Tilray may accomplish this by making new product lines like vaporizers, which have higher margins, or by increasing the scale of its existing facilities.
Management expects that Tilray's European operations will be more successful than their Canadian counterparts, thanks to Europe's larger, denser populations, reduced competition, and the low cost of cultivation and manufacturing in Portugal that enables the company to export its products tariff-free to the European Union. Inexpensive cultivation is a critical differentiator for Tilray's participation in the European market, as one of the company's largest issues is that its cost of goods sold per gram of bulk hemp product has consistently increased over time.
How Tilray could grow next year
Tilray's most recent earnings report suggests that the company's efforts to stabilize its losses are working, with net losses falling by 16% year over year. The company also posted a 14.3% increase in the amount of bulk hemp product sales compared to the prior year, along with a 23% increase in adult-use sales. These sales figures are unambiguously positive, though the company's primary revenues stem from medicinal sales rather than adult-use sales, so the overall effect on the bottom line may not be significant.
If Tilray can continue to scale up its most profitable cultivation facilities while cutting its costlier ones and breaking into the nascent European market next year, it can ostensibly become profitable and enter a period of rapid growth at the same time. This means that Tilray has a chance of being a good pick for a cannabis stock portfolio -- but the company's success is far from guaranteed.
Investors should pay close attention to Tilray's upcoming announcements to see how the company plans to implement potential production changes without harming its growth. More importantly, look for more details regarding the exact steps that the company is taking to reach profitability. Once Tilray can solve its high production costs at the source, it will be better positioned to compete in its home market as well as its target international markets.
