Tilray Brands (TLRY 3.43%) is eyeing lots of growth in the years ahead in the Canadian, U.S., and European pot markets. The cannabis producer is the largest one in Canada, but a lack of legalization in other parts of the world is limiting its growth today, with the company's top line struggling in recent quarters to give growth-oriented investors much of a reason to buy its shares.
However, the company has been making moves to expand its position in the Canadian market as well as prepare for the possibility of a legal U.S. cannabis market becoming accessible in the future. And on the company's latest earnings call, investors also learned where future acquisitions may come from ahead.
Tilray's strong cash position could facilitate more M&A
Earlier this month, Tilray reported its first-quarter numbers for its fiscal 2023 (ended Aug. 31). The company's cash balance grew from $415.9 million to $490.6 million over the past three months. Tilray's cash burn has been improving with negative free cash flow of $47.8 million over the past three months coming in at less than half the $101.8 million in negative free cash it reported a year earlier.
Tilray CEO Irwin Simon cited that improved cash balance when saying on the company's recent earnings call that the company had the ability to take on more acquisitions in the future. And acquisitions may be key to the company's ability to hit its target of $4 billion in annual revenue in fiscal 2024. Net revenue in Q1 totaled $153.2 million, which was down 9% year-over-year and puts the business at a run rate of approximately $613 million.
The company clearly has a lot of ground to make up to hit its sales target, making mergers and acquisitions a likely necessity.
What types of deals should investors expect?
There is no shortage of opportunities out there for Tilray, but two markets that may be among the most likely for it to focus on are the U.S. and Canada.
In its home market, Canada, the company's market share is just 8.5% -- nowhere near the 30% it is aiming for there. Simon predicted that "the Canadian market will consolidate and that "a lot of LPs will go away." Previously, he referred to smaller growers as "ankle biters" as they chipped away at the company's market share.
One company that Tilray has shown interest in is Canadian cannabis producer Hexo, which Tilray acquired convertible debt of earlier this year. The two businesses will be working closely on product innovation and achieving cost synergies. While it hasn't announced plans to fully acquire Hexo, it wouldn't be surprising if Tilray were to pursue that at some point down the road.
Another opportunity that Tilray looks to be focused on is in the U.S. Although it can't directly invest in pot producers (due to the federal ban on marijuana in the U.S.), it can take positions indirectly in multi-state operators. Last year, it acquired MedMen's convertible debt, which would allow Tilray to potentially take an ownership stake in the business upon marijuana legalization in the U.S.
However, Simon doesn't appear to have the appetite to do a similar deal anytime soon. "I thought MedMen had a great brand, has great presence in different states within the U.S. And there's a lot we're learning in regards to consumer trends that we're taking back. We did one [deal] and ... I don't want to do another one until I know what we can do."
Instead, it's more likely that the business will focus on businesses that could complement its future growth opportunities. Irwin stated that "from a U.S. standpoint, what we're going to continuously do is look at acquisitions in the consumer area with adjacency to cannabis." One example is the company's move last year to acquire brewer Breckenridge Distillery. Alcohol and consumer goods are a couple of industries Tilray could target in the U.S. while the pot market remains off-limits due to a lack of legalization.
It wouldn't surprise me if the company were to take on multiple acquisitions in both Canada and the U.S. given the massive growth that it is planning to achieve in the not-too-distant future.
Is Tilray a buy on this news?
Acquisitions can be a great way for a company to expand its operations, but they don't always end up a net positive for investors. Although Tilray does have cash to do more acquisitions, its core business is still burning cash. In all likelihood there will be shares used in any future deals, which will lead to dilution for existing shareholders, and thus downward pressure on an already beaten-down stock that has fallen 68% in 12 months (which is worse than the Horizons Marijuana Life Sciences ETF decline of 58%).
The company doesn't have a strong business just yet, and its future still remains a question mark. For those reasons, Tilray remains an extremely risky stock to own, and it's only a suitable option if you're willing to be patient and hold for years -- and also accept that you could stand to lose a significant amount of your investment.
