Tilray (NASDAQ:TLRY) stock had touched highs of $67 in February 2021. There were two primary reasons for the rally.
First and foremost, U.S. Presidential elections sparked optimism of a sooner-than-expected Federal level legalization of cannabis. Furthermore, Tilray had announced a merger agreement with Aphria, which was expected to create the world’s largest cannabis company.
However, it didn’t take time for the rally to fizzle out. The euphoria was replaced by growth and cash burn concerns.
After a sustained downtrend, TLRY stock currently trades at above $7. The selling seems overdone and the stock is poised for a reversal rally.
A Closer Look at TLRY Stock
For the first quarter of 2022, Tilray reported revenue of $168 million. On a year-on-year basis, revenue growth was 43%. It’s also likely that revenue growth will continue to accelerate in the next few years.
Back in August 2021, the company’s chairman and CEO shared a $4.0 billion revenue plan by 2024. If the company is to meet this guidance, growth needs to accelerate.
Tilray believes that the global cannabis market opportunity is worth $186 billion. With more countries legalizing cannabis for medicinal and recreational, there is significant untapped opportunity. Tilray, being the largest player globally, is well-positioned to capitalize.
Tilray is focused on medicinal cannabis, which can be a long-term game-changer. The company already has a distribution network in Germany with a leadership position.
Additionally, Tilray has an end-to-end European Union Good Manufacturing Practices (EU-GMP) supply chain. The company estimates that the European medicinal cannabis market will be worth $3.9 billion by 2025. As the market gets bigger, Tilray is likely to witness growth acceleration.
Another factor that’s likely to support growth is acquisitions.
In August 2021, Tilray acquired MedMen, which is a leading U.S. cannabis retail brand. Tilray has already acquired Manitoba Harvest, a maker of branded hemp-based food products in the United States.
The acquisition of SweetWater will help the company expand into cannabis-infused beverages in the U.S. The key point here is the sustained belief that Federal level legalization of cannabis is around the corner. Tilray is already expanding its presence in the U.S. This is a key growth acceleration catalyst.
Ongoing Cash Burn
Tilray reported its tenth consecutive quarter of positive adjusted EBITDA for Q1 2022. However, the markets are likely to remain unimpressed with positive “adjusted” EBITDA.
The key point to note here is that Tilray reported negative adjusted free cash flow of $61.2 million for the quarter. FCF is likely to remain negative in the coming quarters.
The reason is high spending on research and development. Additionally, as Tilray expands into new markets, selling and marketing expenses will remain high. This is not necessarily a concern if top-line growth accelerates.
However, it’s worth noting that Tilray reported cash and equivalents of $376 million as of Q1 2022. Considering the rate of cash burn, equity dilution might be on the cards.
Having said that, TLRY stock might have already discounted any dilution or leveraging factor. Fundraising to accelerate growth is likely to take the stock higher.
Concluding Views
Cash burn has been a challenge for all companies in the cannabis industry. However, as the market size expands, operating leverage is likely to ensure that key margins improve.
Tilray has a healthy presence in the medicinal and recreational cannabis segment. The company has leadership position in key markets like Canada (recreational cannabis) and Germany (medicinal cannabis).
With the possible Federal level legalization of cannabis in the United States, the company has ample headroom to accelerate growth.
TLRY stock looks attractively valued at current levels. I expect the stock to quickly double once there is a reversal rally.
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 InvestorPlace.com 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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
