Though the coronavirus pandemic has meant a marijuana boom in many areas, Canadian cannabis stocks are having a hard time generating profits. Most of them haven't even achieved positive earnings before interest, tax, depreciation, and amortization, or EBITDA. A smaller market than that of the U.S., regulatory holdups, fewer legal stores than expected, and pandemic restrictions have all served as headwinds.
While most of the popular Canadian players have been disappointing investors, Tilray (TLRY -4.89%) managed to impress with its fourth-quarter (ended May 31) results. This is the first quarter of reported earnings since the company's merger with Aphria was completed in May -- and it's also the first quarter in which the company has reported a profit. It is safe to say the merger proved beneficial to Tilray. But the quarterly results don't reflect all the reasons to consider buying Tilray. What else is there?
Image source: Getty Images.
A stronger and better company post-merger
Tilray was a smaller company before the merger, with a market cap of $1.1 billion, but the combination with Aphria has brought that number to $6.6 billion. Taking advantage of the two companies' efficiencies resulted in a fruitful quarter. In Q4, net revenue increased 25% to $142.2 million, which included four weeks' worth of net cannabis revenue -- $54 million -- from the legacy Tilray prior to the merger's completion. The company's U.S. acquisitions, hemp foods maker Manitoba Harvest and craft beer maker SweetWater Brewing, added $15.9 million and $5.8 million each to total revenue.
Tilray also saw a drastic year-over-year jump of 285% in EBITDA, to $12.3 million, marking the ninth consecutive quarter of positive adjusted EBITDA. The company generated positive free cash flow of $3.3 million in the quarter. Tilray reported a net profit of $33.6 million, versus a net loss of $84.3 million in the year-ago period.
Management explained in the earnings call that Tilray generated this profit by recognizing $121.5 million in net non-operating income (income derived from activities not related to the company's core business). This happened "due to an unrealized gain on our convertible debentures driven primarily by the change in our share price and the change in the trading price of the convertible debentures," CFO Carl Merton said on the earnings conference call. Convertible debentures are long-term bonds, loans, and/or debts issued by a company that can be converted to shares after a particular time period.
However, its long-term growth opportunities give me hope the company will be able to generate real profits soon.
Tilray plans to strengthen its roots, nationally and internationally
Post-merger, the combined company's strength lies in its international markets, specifically the European market. Aphria already had a strong market presence in medical cannabis not only in Canada and Europe, but also in Africa, South America, and Oceania.
The company has long derived a chunk of total revenue from distribution revenue from its Germany-based subsidiary, CC Pharma, and that continued this quarter, with distribution revenue contributing 47% of the new Tilray's total. However, that total did decline by 10% from the year-ago period, to $66 million, mostly affected by the coronavirus lockdown in Germany.
The U.S. market is a long shot for Tilray until federal legalization happens. But its Canadian, international, and European markets can be its revenue and profit drivers in the meantime. According to BusinessWire, the European cannabis market could expand at a compound annual growth rate of 29.6% to be worth $37 billion by 2027. This could be a tremendous opportunity for Tilray.
Management expects its German subsidiary and its low-cost production facility in Portugal to be the driving factors for its success in the European Union. Tilray also plans to expand to Poland, Italy, the U.K., France, the Netherlands, and Israel; it expects full cannabis legalization to happen in all of those places before it takes place in the U.S.
According to management, Tilray already holds the No. 1 market share in Ontario and Quebec. The company plans to introduce more innovative products in the derivatives segment -- concentrates, edibles, and drinks, in particular. Canada legalized these additional recreational products in October 2019 as part of its Cannabis 2.0 campaign. The company aims to increase its overall market share in Canada from 16% now to 30% by fiscal year 2024.
The path looks greener for Tilray, but ...
CEO Irwin Simon has said he believes that if the U.S. legalizes marijuana, Tilray will be able to generate $4 billion of revenue by 2024. The European market could contribute $1 billion to that. Furthermore, he believes the new Tilray, along with the SweetWater acquisition, "combines cannabis with a [consumer packaged goods] and health and wellness company" that could be a winner in the long run. The company ended the quarter with cash and cash equivalents of $488.5 million and long-term debt of $167 million.
Irwin also stated that the company has achieved $35 million in cost reductions because of the merger and is on track to hit its $80 million target in the next 18 months. However, according to management, these calculations don't include any revenue synergies (revenue to be generated from the combined company) to be achieved from the merger.
Tilray's stock is up 58% so far this year, while Canadian peers Aurora Cannabis and Canopy Growth have fallen by 20% and 29%, respectively. Analysts still expect an upside of 28% for the stock in the next 12 months, which I think is possible given its growth opportunities.
Canadian marijuana stocks are still a risky bet and expensive compared to their U.S. counterparts. Once federal legalization happens, the U.S. multi-state operators that are already profitable will benefit first.
Investors who have a strong risk appetite and patience to see Tilray achieve its full potential five to 10 years down the line can start with a small investment. For others, U.S. cannabis stocks like Green Thumb Industries and Trulieve Cannabis are a better fit for your portfolio for the long term.
