The past year hasn’t been kind to Tilray (NASDAQ:TLRY) investors. TLRY stock is down a stunning 84% since this point in time in 2018. As it turns out, existing in the cannabis space isn’t a guarantee of profits. And, it’s also reasonably safe to say excessive hype set most of the big names up for even bigger falls.
Although there’s little more ground left for TLRY stock to give up, the bearish momentum is palpable. Each daily setback seems to stir up more panic.
It wouldn’t be crazy to put Tilray stock back on your prospective buy list though. The company’s nuances that drew criticism may be about to turn back in its favor.
Less Production, More Retailing
Tilray CEO Brendan Kennedy has alluded to this idea before, but he made a point of highlighting it during August’s second-quarter conference call.
“… and we’ve signed long-term wholesale supply agreements to support our cultivation asset-light model and enable us to focus on the cannabis value chain further downstream,” Kennedy said.
Translation: Tilray has chosen to not commit a great deal of time and money to its own growing facilities. Rather, it’s more interested in product development and retailing.
That’s in sharp contrast to rival cannabis companies like Canopy Growth (NYSE:CGC), which has been adding growing acreage at a brisk clip. Aurora Cannabis (NYSE:ACB), meanwhile, remains the growth leader, producing roughly 150,000 kilograms of cannabis per year now. And now it has the potential to produce more than 600,000 kilograms by this time next year.
Thus far, opting to not wade deep into home-grown production waters has proven problematic. Kennedy said in May that supplies were tight, holding the company’s top line back.
“We would argue that TLRY has been the most impacted by weak industry supply as its asset light model was initially overly reliant on third-party supply,” Cowen analyst Vivien Azer said in early September.
A closer look at the industry’s supply and demand dynamics suggests supply isn’t a problem. Indeed, technically speaking, a supply glut is already taking shape. The difficulty has been connecting growers with buyers and retailers. Once that process becomes more efficient, Tilray’s business model may reward the restraint Kennedy has exercised to date.
A Glut Looms
It wasn’t a dire problem until March of this year. But then, it became a massive problem. March is the month Canada’s cannabis industry sold 8,806 kilograms of the 39,741 kilograms of cannabis produced. That surplus eclipsed 50,000 kilograms in June — the last time Cannabis Benchmarks crunched the official numbers. But, the organization’s estimates through September suggest there’s enough on-hand inventory to meet three years’ worth of demand (with production capacity being added on a near-daily basis).
The glut hasn’t yet taken a toll on pricing. As of last week, the average selling price for a gram of marijuana in Canada fell a bit from the prior week, to $7.31. That’s more or less in line with where pricing has been for weeks now, and is actually up since the beginning of the year.
Once better logistics are put in place though, the supply glut will likely lead to considerably lower prices. Then Tilray can make and create new cannabis-based products at lower costs. In turn, the company can offer pot products at lower prices than many of its rivals can — rivals that paid steep prices for production capacity.
Bottom Line for Tilray Stock
In May, Kennedy conceded that in ten years he wants Tilray to grow a modest 5% of the industry’s product. Given the looming boom in supply though, the company could grow none of its own cannabis and would still find ample, affordable supply as farms and retailers continue to find one another.
Exactly how, or how much, that will benefit Tilray stock remains unclear. But, given that so many marijuana names have already committed time and money to production capacity when pot prices were firm, the argument that they overpaid for that land holds even more water. That leaves Tilray with at least a little more fiscal flexibility than most of its peers.
The trick, of course, will be snapping Tilray stock and other cannabis equities out of their group-wide funk.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.