On July 28, Tilray (TLRY +6.68%) stock surged by 26% in a single trading day after the company published strong quarterly results -- the first earnings report its $4 billion merger with fellow Canadian pot grower Aphria. Revenue shot up, the company finally turned a profit, and its international expansion has begun to pay off.
Tilray desperately needed that good news, as its shares are down almost 50% year to date. Let's look at why the future looks bright for this once-beaten-down marijuana company.
Image source: Getty Images.
Gaining traction
It was pretty obvious that a turnaround was coming. Tilray derives the vast majority of its revenue from pot sales in Canada and Germany. In the first half of 2020, both countries implemented strict, brute-force lockdown measures, including curfews and retail store closures, to contain the coronavirus, citing a shortage of vaccines. The supply disruptions led Tilray to lose an estimated 100 million Canadian dollars in revenue during the period. Now that both countries' vaccine campaigns are under way, the restrictive measures have eased -- meaning no more business disruptions.
During the fiscal fourth quarter of 2021 (ended May 31), Tilray grew its revenue by 25% year over year to CA$142.2 million. Free cash flow improved 112% to CA$3.3 million from a loss of CA$28.3 million. Based on these figures, the company expects to generate CA$4 billion in revenue by 2024 -- a big step from CA$513 million for fiscal 2021. A big part of the bearish sentiment was skepticism that the company could return to growth or break even. Those questions have now been answered.
A sizable international expansion
Contrary to popular belief, Tilray doesn't need a boost from the legalization of cannabis in the U.S. to continue its momentum. The company recently closed the acquisition of SweetWater Brewing, which is the 11th largest U.S. craft brewery with over 4,000 point-of-sale locations. In addition, Tilray's subsidiary Manitoba Harvest provides CBD wellness products across 17,000 stores throughout North America. Both businesses generate more than CA$100 million per year in revenue each, and both are profitable.
Aside from the U.S., Tilray is also gaining ground in Germany, where its subsidiary CC Pharma distributes medical marijuana products across 13,000 pharmacies. Over half of Tilray's total revenue comes from its German operations.
A solid foothold in the domestic market
Tilray currently holds a 16% market share in the Canadian marijuana industry -- roughly tied with Hexo and Canopy Growth. But management thinks they can double that amount. Because of extended provincial lockdowns, Canada's marijuana market has essentially gone silent for seven months. The country's marijuana stores could grow to 3,000 by the end of next year from about 2,000 today -- and Tilray is primed to take advantage of that.
The company's vape brands are also extremely popular with consumers. It has managed to sell well over CA$100 million worth of those in the past year -- compared to zero just two years ago.
Overall, given its profitability, return to growth, solid domestic foothold, and rising international sales, Tilray is a fantastic stock to buy, especially after year-long dips in the sector. It's somewhat undervalued at the moment at just 8.4 times revenue. It's a lot cheaper than other industry leaders such as Canopy Growth (CGC +3.14%) and Cronos (CRON +1.20%), which are trading for 12 and 37 times revenue, respectively.
