Tilray Inc (NASDAQ:TLRY) is a medical and recreational cannabis company. The stock underwent a massive short squeeze when it went public, with the equity hitting an intraday high of $300 from its initial public offering (IPO) price of $17 per share. Now TLRY is a lot lower, currently trading hands at around $43 per share.
The fall in TLRY isn’t because the cannabis sector isn’t worthy of investment. Even former bears such as Whitney Tilson acknowledge that cannabis is a real growth sector.
Due to the growth potential, quality cannabis companies could ultimately generate great returns for shareholders. That’s why alcohol conglomerate Constellation Brands (NYSE:STZ) spent $4 billion to buy a piece of leading cannabis company, Canopy Growth (NYSE:CGC) and why tobacco giant Altria (NYSE:MO) invested $1.8 billion into marijuana producer Cronos (NASDAQ:CRON).
The also-rans, however, might be left in the dust.
Whether TLRY will be one of the quality companies or one of the also-rans depends on how management executes. For investors, here are some potential catalysts to look for to know that management is executing:
Value Generating M&A for TLRY
Given its current position in the cannabis sector, Tilray is a little undersized versus other bigger cannabis firms.
For the first quarter, Tilray reported sales of $23 million and total kilogram equivalents sold of 3,012 kilograms. By comparison, Canopy Growth reported net revenue of $94.1 million for the fourth quarter of fiscal 2019, with 9,326 kilograms and kilogram equivalents sold. Being smaller generally means lower margins due to less scale than the leader.
To get bigger, Tilray has bought some companies. In the first quarter, the company acquired hemp producer Manitoba Harvest for up to $310 million and Natura Naturals Holdings, a licensed cannabis cultivation facility, for up to $54 million. And recently, in Tilray news, the company announced that it was buying boozy candy corporation Smith & Sinclair.
Currently Smith & Sinclair infuses alcohol into various food products to create boozy treats. Tilray hopes that it can use Smith & Sinclair to infuse cannabidiol (CBD) into various treats. With its potential branded line of CBD edibles, Tilray would not only increase in scale but also differentiate itself. CBD is a non-psychoactive cannabis compound that is legal federally due to the passage of a farm bill through Congress last year.
If Tilray can make more value-generating acquisitions, it could fix its smaller scale and realize higher margins. If Tilray management makes good value generating M&A deals, the announcement of those deals could be a potential catalyst that sends shares higher.
Tilray has a research partnership with Anheuser-Busch InBev SA in which each company will invest up to $50 million for R&D related to drinks infused with THC or CBD. Tilray is working with drug company Novartis’ generic drug arm, Sandoz, to potentially produce non-smokable medical cannabis products where that’s legal. If either of those efforts produce in-demand products, Tilray could benefit.
Any sort of partnership announcement with a bigger firm could potentially be a positive catalyst that sends Tilray stock rising too.
A Corporate Investor With Deep Pockets
One bearish factor for Tilray is that most of its stock is owned by one shareholder, Privateer Holdings, which held around 77% of Tilray’s total shares outstanding as of June.
Although Tilray has signed a non-binding letter of intent with Privateer Holdings to provide an orderly release of the shares owned by Privateer, the potential for big share sales still weighs on the stock. If Tilray can find a bigger firm with financial resources to invest, like Canopy has with Constellation Brands, that bearish factor will be lessened.
Any sort of deal where a bigger firm buys a big percentage of Tilray at an above market price could be another potential catalyst that sends Tilray stock soaring.
As of this writing, Jay Yao did not hold a position in any of the aforementioned securities.