For Patient Investors, Tilray Will Deliver Multi-Fold Returns

In the age of penny stocks and social media driven stock surge, the investment time horizon seems to have altered significantly. However, there are several investment themes with multi-year tailwinds. It makes sense to hold some quality names from these themes for the next few years. Tilray (NASDAQ:TLRY) stock is one that deserves a place in the long-term portfolio. The cannabis industry seems to be at an inflection point and Tilray is a potential value creator.

Tilray (TLRY) logo on a web browser.
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If we look at the 52-week range, the stock has witnessed significantly volatility. After skyrocketing to highs of $67, TLRY stock witnessed an equally sharp correction. At just more than $10, the downside risk seems limited and the upside potential is meaningful.

Tilray believes that the global cannabis market is worth $186 billion. This presents a big growth opportunity. However, only two out of 196 countries have legalized the use of cannabis for adults. For medicinal cannabis, the adoption has been swifter, with legalization in 47 countries.

In the near term, a key catalyst for TLRY stock is a potential federal level legalization of cannabis in the United States. Further, as more countries legalize adult-use of cannabis, the addressable market is likely to get bigger.

Tilray reported revenue of $168 million for the first quarter of 2022. This would imply an annualized revenue rate of $672 million. The management has outlined a plan that targets $4 billion revenue by 2024.

This is a clear indication of the impending growth over the next few years. If Tilray is anywhere close to this target, the stock is poised to deliver multi-fold returns.

Focus on Medicinal Cannabis

I believe that the company’s focus on medicinal cannabis is likely to be a long-term game changer. An important point to note about the medicinal cannabis segment is that research gaps exist. In simple words, most of the medicinal cannabis products are not backed by clinical trials.

Tilray is among the few players in the industry that’s focused on evidence-backed medicinal cannabis. Last year, CEO Irwin Simon talked about “10 clinical trials announced and numerous distributor relationships.” This includes a global agreement with Sandoz, a division of Novartis (NYSE:NVS).

The company’s CC Pharma subsidiary in Germany already provides access to 13,000 pharmacies. Additionally, the company has an EU-GMP certified cultivation and production facility in Portugal. Clearly, Tilray is building a strong base for accelerated growth in the medicinal cannabis business.

Recently, the company’s CEO also indicated that Tilray is looking for potential acquisition targets in the medical business. This is likely to further boost the company’s presence in a promising segment. Importantly, countries have been more open to legalization of medicinal cannabis than cannabis for recreational use.

Bottom Line on TLRY Stock

For the company’s first quarter of fiscal 2022, Tilray reported revenue growth of 43% on a year-on-year basis to $168 million. Adjusted EBITDA was $12.7 million. This was the 10th consecutive quarter of positive adjusted EBITDA. With top-line growth and operating leverage, it’s likely that EBITDA margin will improve in the coming years.

On the flip  side, Tilray reported cash used in operations of $93.2 million. Cash burn is likely to sustain with investments related to research, marketing and geographical expansion.

Tilray reported cash and equivalents of $376 million for the quarter. With the company targeting acquisitions, further equity dilution might be on the cards. However, TLRY stock already seems to be depressed. Growth acceleration through the organic and inorganic route is likely to ensure that the stock trends higher.

Overall, Tilray has an ambitious plan to increase revenue to $4 billion by 2024. This might be an optimistic case scenario. However, it’s likely with an impending federal level legalization of cannabis and potential inorganic growth. TLRY stock is therefore worth accumulating after a big correction.

I would not be surprised if the stock doubles from current levels in the next 12 months.

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

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with focus on the technology, energy and commodities sector.

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