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Tilray’s $4B Revenue Target Needs More Than Organic Growth

When Aphria concluded the biggest cannabis space merger of the year with Tilray (NASDAQ:TLRY) in an all-stock transaction in May, CEO Irwin D. Simon and his team had the option to slow down on acquisitions and focus on organically growing TLRY stock, realize the $81 million in promised synergistic benefits,  improve margins and making the legacy Tilray business as profitable as Aphria had become.

Tilray (TLRY) logo on a web browser.

Source: Jarretera / Shutterstock.com

But the Tilray executive team has much bigger dreams of conquering the global cannabis space instead. Plans include an ambitious target to report $4 billion in revenue for fiscal year 2024.

An Overly Ambitious Target for TLRY Stock?

The company billed for $513 million in revenue for fiscal year 2021, which ended in May. The figure included some contributions from legacy Tilray during the last few weeks of May.

We can confidently say the combined company generated much more in sales for 2021. Its proforma revenue for the trailing 12 months to Feb. 28, 2021, was a healthy $672 million with a 23.2% gross margin.

Whichever base one decides to work with, the company has a tremendous task ahead to realize its $4 revenue target over the next three years. Organically, TLRY must increase its annual revenue at compound annual growth rates (CAGRs) of between 81.2% and 98.3% annually to hit the 2024 target.

Current estimates see the global cannabis market growing at CAGRs of 28% to 2026, from 2020 levels.

The thing is, it’s much easier to grow at above-market rates when you are a small, disruptive player in an industry. The opposite is true for Tilray. Currently, the largest industry player by revenue, the company is only expected to grow sales at a CAGR of 24% per annum to $1 billion by 2023.

Another big industry player, Canopy Growth Corp (NASDAQ:CGC), is expected to grow sales at a higher rate of 26.3% during the same period.

Could Tilray defy the odds and organically double its annual revenue every year? That looks impossible.

What It Takes for Tilray to Hit $4 Billion by 2024

In its current post-merger state, Wall Street expects TLRY to report annual revenue growth of 57% year-over-year to $807 million for fiscal year 2022. Sales may top $1 billion for the very first time by May 2024.

Notably, the elevated growth outlook in 2022 is mainly a result of full consolidation with legacy Tilray. Otherwise, growth rates may normalize to under 23% for 2023.

The company wants to nearly double its retail market share in Canada (its major market) from 16% to 30% by 2023. That should help TLRY stock valuation next year — if achieved.

Its Europe segment (especially Germany) distribution revenue growth stalled after insurance reimbursement legislation changes in 2020. Exports to Israel and emerging distribution markets in Spain, Portugal, and the U.K. could contribute some meaningful numbers, but I wouldn’t expect much from a market that is only expected to grow to a near-$3.8 billion size by 2025.

One may still point to U.S. legalization. Even if President Joe Biden’s administration federally legalizes cannabis use during the period, TLRY’s potential acquisition target MedMen Enterprises (OTCMKTS:MMNFF) is projected to report just $179 million in sales for 2022. But federal legalization may take time.

Technically, I don’t see any other way the company may organically achieve a $4 billion annual sales run rate by mid-year 2024 (a 300% annual growth from projected 2023 revenue) besides aggressively gobbling up industry peers.

How Big Could TLRY’s Acquisitions Be?

If we take Wall Street’s projections as a guide, TLRY needs to acquire or merge with two companies nearly its current size to entertain hopes of reaching its revenue target three years from now. Alternatively, Irwin Simon could target several smaller players. We are looking at potential multi-billion-dollar transaction sizes here, and/or several smaller deals.

Ailing competitors like Aurora Cannabis (NASDAQ:ACB) and even Sundial Growers (NASDAQ: SNDL) could be easy targets post-re-organization. Aurora has a beautiful and sizeable medical cannabis client portfolio anyway.

TLRY increased the number of authorized shares by 33% to 990,000,000 this September, and how its CEO highlighted this move as a key to the achievement of its ambitious growth target. The growth machine looks well oiled.

Tilray could embark on an aggressive stock-based acquisitions spree to further consolidate the North American and European cannabis markets.

My only concern is that acquisitions are generally a low-quality source of growth. They are usually expensive, carry significant execution and integration risks, and come with significant dilution for current common stock investors. Not all growth is the same.

Investor Takeaway on TLRY Stock

It is possible that Tilray can post a $4 billion annual revenue by May 2024. However, it may achieve the overly aggressive target through an expensive acquisition-led growth strategy with little organic growth. Current TLRY stock investors are sure to experience significant dilution — a necessary expense to pay for high growth ambitions.

Or else, management may miss the target, or move it further in time, much to investor disappointment.

On the date of publication, Brian Paradza did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.


Article printed from InvestorPlace Media, https://investorplace.com/2021/09/tilrays-4b-revenue-target-needs-more-than-organic-growth/.

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