Distributive policy

Is Tilray a buy after Biden changes marijuana policy? Surprisingly yes! (NASDAQ:TLRY)


Tilray (NASDAQ:TLRY) saw its stock explode after President Biden announced plans for cannabis policy reform. Although the stock fell after reporting its earnings, I doubt the results matter as much in the short term, as it is a stocks that have often traded on hype and will likely remain the case after President Biden’s announcements. While there are understandable rationales for buying TLRY, including its competitive positioning prior to full legalization in the United States, one constant caveat has been the exact timing of that legalization as well as business fundamentals. in the meantime. The fundamentals are not as attractive compared to those of US traders, but as long as institutional capital is prevented from investing in US cannabis stocks, TLRY can continue to be a dynamic name in the sector.

TLRY stock price

Although it has no physical operations in the United States, the Canadian operator’s stock soared more than 34% in the last hour of Thursday’s trading session after the announcements were released. Biden revolutionaries.

Data by YCharts

The stock has since pulled back significantly, although it should be noted that even many stocks in the US sector have also seen weakness. I suspect the weakness was more related to broader market weakness, as growth stocks overall fell double digits across the board. In the short term, anything is possible with cannabis stocks like TLRY.

Key TLRY Stock Indicators

I’ll talk about President Biden’s announcements in a moment. Let’s start by analyzing the results of the last quarter. TLRY reported net income of $153.2 million, representing a 9% year-over-year decline. Currency fluctuations had an impact on the results – at constant exchange rates, revenues decreased by “only” 1%. I put “only” in quotes because you shouldn’t expect a drop in revenue in the cannabis business given its centuries-old growth drivers. This revenue figure slightly underperformed consensus estimates.

surprise profit

Looking for Alpha

Even despite the weak revenue, TLRY noted that it maintained its top market position in Canada with an 8.5% cannabis market share.

TLRY achieved adjusted EBITDA of $13.5 million, its 14th consecutive quarter of positive adjusted EBITDA and reflecting the fruits of their cost savings. During the conference call, management indicated that it has already achieved $95 million in expected savings on adjusted EBITDA this year (last quarter is the first quarter of fiscal 2023) with $5 million in additional savings expected for the remainder of the year.

While most investors will undoubtedly know TLRY as a cannabis company, the fact remains that as a percentage, most of TLRY’s business is non-cannabis, with 62% of revenue coming from other sources such as alcohol.


FY23 Q2 press release

This is important to note, as distribution and wellness revenues generate significantly lower gross margins and should be considered of lower value than cannabis revenues.

activity area

FY23 Q2 press release

Regarding Adjusted EBITDA – one can make up their own mind if the figure is reliable as there are many adjustments in this number. I note that after including interest and tax expense, “adjusted EBDA” was positive.

Adjusted EBITDA

FY23 Q2 press release

Management reaffirmed full-year guidance for adjusted EBITDA of up to $80 million and positive free cash flow. The drastic measures taken to resize the balance sheet have been crucial for these orientations. TLRY ended the quarter with $490.6 million in cash versus $641.1 million in debt, reflecting a sequential improvement as the company raised $129.6 million through its ATM program. 70% of the debt was fixed rate. Not only is management advice critical in justifying the valuation (if anyone is focusing on fundamentals here), it will also play a role in determining whether the company should tap into the capital markets again.

What has Biden been doing with marijuana policy lately?

President Biden has announced that he will pardon federal criminal offenses related to simple possession of cannabis and that he will seek to reschedule the plant.

Taken in isolation, these actions might not mean much as they do not necessarily imply full legalization. That said, it raised hopes for the adoption of SAFE Banking, as many Democratic senators had previously opposed SAFE Banking because they wanted more social equity components. Perhaps if the president can follow through on those promises, Democratic senators may be more willing to push SAFE Banking to keep the momentum going.

How will Tilray be impacted by this change?

What impact does this have on TLRY? The stock has always been a game on the legalization of cannabis in the United States. While SAFE Banking falls short of full legalization, it could be argued that the adoption of SAFE Banking has always been the first step before legalization, meaning that these latest developments represent progress towards legalization.

But maybe some TLRY bulls read deeper between the lines. I mentioned earlier that President Biden is looking to reprogram cannabis – we can see the exact verbiage below.

President Biden's tweet


The “more serious than fentanyl” note has been interpreted to imply that cannabis could be re-scheduled as a schedule 3 drug, given that fentanyl is a schedule 2 drug. , effectively legalizing cannabis, but again, this is open to wide interpretation.

TLRY stands to benefit from the legalization of cannabis due to two main factors. Above all, it still has a portfolio of greenhouses that can produce cannabis inexpensively on a large scale. It is precisely because of the lack of scale (the Canadian market just isn’t that big) that has been a thorn in the company’s fundamentals – but all of that may change if the company is allowed to export. products in the US market.

Second, recall that TLRY had previously invested $165.7 million in US multi-state operator MedMen (OTCQB:MMNFF) convertible notes (equivalent to 21% of the outstanding shares).

This investment only becomes “valid” after legalization. MMNFF offers a well-known brand name and multi-state exposure.


Presentation MedMen 2021

What is the long-term forecast for TLRY stock?

Consensus estimates call for strong revenue growth of 20-30% after this year.

consensus estimates

Looking for Alpha

As long-time investors know, however, consensus estimates have always seemed to predict accelerating growth rates, but this has never quite developed as there has always been setback after setback in the Canadian market. I wouldn’t trust consensus estimates too much.

Is TLRY stock a buy, sell or hold?

TLRY is not too expensive here on a fundamental basis. The stock is trading at around 3 to 4 times the sell. If we assume a long-term growth rate of 15%, long-term net margins of 15%, and a price-earnings growth ratio of 1.5x (“PEG ratio”), then TLRY could be trading at around 3.4x sales, which means any future growth could benefit shareholder returns – and I note that the cannabis sector is likely to see PEG ratios well above 1.5x.

Among Canadian operators, TLRY is the only big name generating positive Adjusted EBITDA and the shares are trading reasonably against their peers.


Cannabis Growth Portfolio

Of course, there’s a lot of risk here given the cash burn and stock dilution. But I suspect most investors just don’t care about fundamentals here and focus on hype and momentum. This is understandable given that the title has indeed behaved like a dynamic title in the past.

Data by YCharts

The company is no doubt also fueling this fire. We can see below that the company calls itself “No. 1 in global cannabis revenue”, but in fine print, that excludes the United States.

market positioning

FY23 Q2 press release

Additionally, despite the ongoing cash burn, management continues to show a strong position, saying it is in a position to go on the offensive with M&A:

And I think the most important thing, what I said in my remarks, is here. Our plan — we have close to $0.5 billion in cash. So we have the ability to make acquisitions. We have a solid business with many growth opportunities in Canada. We have an excellent international infrastructure in Portugal and Germany. And with the United States today, we have acquired businesses in the beer industry, the spirits industry, and have a wellness business.

Finally, there’s the technicality that most institutional capital is barred from investing in US cannabis stocks because the plant is federally illegal. This means that if they want to invest in the cannabis business, TLRY offers the most liquid way to do so. So there are clear reasons why TLRY is considered a dynamic title, and the title could continue to rise over the next few months as the hype builds around possible legalization. I’m not a dynamic trader, but I can appreciate the appeal here.

The risks are many. This company is still burning money, has a long history of burning money, and has low insider ownership. For example, CEO Irwin Simon only owns 1.77 million shares, but received $19 million in compensation in 2022 and $13.7 million in compensation in 2021. In my opinion, management and the board directors seem generously remunerated in light of historical cash burn over the past few years. years, but that’s just my humble opinion. It’s highly likely that the hype will eventually die down and the stock will prove to be very volatile – it’s unclear how high or low the stock may go. Although I rate the TLRY stock as a buy, this is only due to the reasonable valuation and I note that I have no position due to more compelling investment options in the US.