A big challenge for Canadian-based marijuana companies is that they have limited growth opportunities these days. The domestic market is highly competitive, and that results in razor-thin margins for producers. It's no surprise that Canadian pot stocks have been among the worst investments you could have owned during the past five years.
That puts a company such as Tilray Brands (TLRY +0.73%) in a tough position. The U.S. market doesn't appear to be opening up anytime soon as regulators don't seem eager to make any serious marijuana reform in the near future. The one opportunity the company has taken in recent years is to expand into adjacent businesses, including alcoholic beverages, as a way to expand its operations and pursue growth.
But there is another opportunity that Tilray sees as being yet another lever to jump-start its growth. At $45 billion, Europe may become a huge market for medical marijuana.
NASDAQ: TLRY
Key Data Points
Germany's recent reform will double Tilray's opportunities in the country
Tilray Brands has a strong presence in Europe already. In fact, one of its key segments, distribution, generates revenue primarily from Tilray Pharma (also known as CC Pharma), the company's German-based distributor, which distributes branded and generic drugs to 13,000 pharmacies. And there has been some reform happening in Germany of late, which has Tilray bullish on both its near and long-term growth prospects in that market.
The country's legislators recently passed a bill that will allow people to grow cannabis at home and make it possible for people to obtain marijuana from "cultivation social clubs." The bill is expected to go into effect on April 1. It won't legalize marijuana for recreational use, but it will result in cannabis no longer being a prohibited substance, making it easier for doctors to prescribe it for medicinal purposes.
The opportunity for Tilray in Germany is promising, as the company notes that these changes will:
Allow Tilray to better meet patient needs by expanding its medical cannabis product offerings, which in turn would significantly increase Tilray's cannabis production in Germany by approximately 5x and more than double its revenue opportunity.
Tilray Chief Executive Officer Irwin Simon says that with the change, the German medical marijuana market is worth $3 billion, and that is just a small slice of the overall $45 billion the entire European medical market may be worth one day.
Tilray's revenue will likely increase, but profitability may be more important
Tilray prides itself on being in more than 20 countries, including key European markets such as Portugal, Italy, and of course, Germany. Opening up more opportunities in Europe is definitely a positive development for the company.
Tilray's distribution business contributed $67.2 million in revenue in the company's most recent quarter, which ended on Nov. 30. It accounted for 35% of the company's top line ($193.8 million). It's already a significant piece of Tilray's business now, and with more growth on the horizon, it'll be a key number for investors to watch.
But it's important not to assume that these developments in Germany will result in an influx of revenue or profit for the business. The key thing to remember is not necessarily that Tilray will double its revenue in Germany, but that its revenue opportunity will double.
And sheer revenue growth many not be sufficient to make the stock a good buy; what cannabis investors have been paying more attention to these days is the bottom line. And last quarter, Tilray still posted a net loss of $46.2 million. While its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were positive at $10.1 million, it declined by 8% year over year.
Without a corresponding improvement in profitability to go along with the revenue growth, it may not be enough of a reason for investors to become more bullish on Tilray's stock, which is down almost 40% during the past 12 months.
Should you buy Tilray Brands stock today?
In the long run, there's no reason to suggest that just because Germany has made changes with respect to medical marijuana, that other European countries will follow suit. New opportunities for the cannabis industry are encouraging, but the bigger $45 billion opportunity across all of Europe could take several years, perhaps a decade or more, before it can come to fruition.
Whether it's legislation in the U.S. or in Europe, it can take a long time to move the needle. And what shape Tilray Brands will be in and how well it will be able to capitalize on those opportunities, should they come up, are two big question marks.
These latest developments give something for investors to watch for when Tilray reports its earnings, but it doesn't drastically make the cannabis stock a better buy today. Tilray remains a high-risk stock that's better suited for your watchlist than your portfolio.
