Tilray Stock Doesn’t Have a Good Path Forward as Revenue Flags

You have to give it to the management behind Tilray (NASDAQ:TLRY) stock: They’ve set an ambitious goal for their firm’s future trajectory. 

Tilray (TLRY) logo on a web browser.
Source: Jarretera / Shutterstock.com

Even so, the market has been quite ho-hum on Tilray’s shares which have lost a lot of value throughout 2021. 

But if you believe Tilray’s management then the future is very bright indeed.

The company has completed its merger with Aphria. That merger made the company the largest global cannabis producer based on its $685 million trailing 12-month pro forma revenues at the merger. The merger was expected to result in synergies of $100 million CAD two years after the combination. 

The company certainly believes in itself, that much is clear. So much so that it has made a bold bet.
Tilray announced in its August shareholder letter that it is targeting $4 billion in revenue by the end of its 2024 fiscal year.

That is a bold plan indeed. If it manages to do so it will have to do a few things which raise serious questions. First of all, the company is going to have to achieve incredible growth rates. 

Let’s understand the math behind the growth targets Tilray’s management has in mind. 

A Closer Look at TLRY Stock

In order to reach revenues of $4 billion by 2024, Tilray will have to just about double its revenues annually for several years. 

The company reported $685 million in TTM pro forma revenues upon the Aphria merger. That occurred in February of this year. For that $685 million to blossom into $4 billion the company needs to achieve average annual growth of 80.07% on a compounding basis for the next three years.

A recent report issued by Grandview Research indicates that is a lofty goal indeed. Their estimate is that compound annual growth should hover around 27% for the cannabis market between 2021 and 2028. 

A nice return to be sure, but nowhere near the 80% necessary to achieve the revenue growth Tilray’s management is targeting. So, what gives? How does Tilray reasonably anticipate it can increase its revenue base by such a staggering amount?

The answer lies in the details and the wording of the announcement.

The announcement read thusly:

“A combination of well-defined organic growth initiatives combined with acquisitions and partnerships would afford us a unique opportunity to expand our business globally and grow into the unquestioned industry leader, with $4B in revenue by the end of our fiscal year 2024.”

It’s fairly obvious that revenues can’t grow 80% unless Tilray magically triples the 27% growth anticipated from the general market. 

That’s why I’d expect Tilray to grow in the manner it already has: via merger. Therefore, if the company is to hit that revenue threshold it’ll be a result of growing much bigger by folding more companies into its operations. 

We already have a precedent for the market reception of such a deal. Tilray absorbed Aphria and share prices have steadily trended downward since. 

What to Do

Tilray seems to want to get bigger and bigger via acquisitions. The company is already the biggest global cannabis company. It isn’t particularly attractive to get bigger and bigger. 

If the Aphria merger is any indication of share price movement, then investors will shy away from such deals. 

You have to commend Tilray for making moves in the still-nascent cannabis space, but the industry profitability is rocky. It is clearly attempting to dominate the space by increasing its already substantial footprint. 

For now though, it seems the chasm between aspirations and reality is too vast. In order to achieve those growth rates, the company will be forced to utilize a tried and tested strategy. Unfortunately, that hasn’t translated to increased stock prices as the Aphria merger has shown.

There’s no rush to buy TLRY stock, it won’t be going anywhere any time soon. 

On the date of publication, Alex Sirois 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.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”


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