When a cannabis company makes an acquisition in Canada a few quarters following the CEO claiming the market is too expensive, investors should take note of the shifting market climate. Tilray (TLRY) still has their own issues that prevent the stock from being investable at the current price, but investors can still learn about the Canadian cannabis market from the CEO.
Shifting Back To Canada
Back in early March, Tilray CEO Brendan Kennedy made the following claim regarding the cannabis investment landscape on the Q4 earnings call:
The United States and European markets are orders of magnitude larger than Canada. So, while Canada will continue to be an important market for us, we expect to focus the majority of future investments on the U.S. and Europe. We will not purchase or invest in what we believe to be overpriced supply assets in Canada, which we believe will erode in value in the medium to long term, as the market normalizes.
His statement was one of the first calls that the cannabis market was indeed over hyped. Of course, Tilray was a prime example trading over $70 and now dipping close to $25.
These statements followed the company buying Manitoba Harvest. The company focuses on providing hemp-based consumer products to the U.S. market.
The news this week is that Tilray paid C$110 million to purchase 420 Investments Ltd., the owner of an adult-use cannabis retail operator in Calgary, Alberta. 420 operates six locations and has 16 additional licenses in Alberta locations including Canmore and Edmonton.
The purchase price amounts to C$5 million per retail location. Also intriguing, the deal was completed via Tilray shares and not cash. The Manitoba Harvest deal was done as a mixture of cash and stock tilted towards more than 50% in cash.
Clearly, the cannabis asset purchase in Canada is more appealing to investors. Tilray is making a statement that the price is far more attractive now.
Unfortunately, Tilray still appears early in the process of shifting back to Canada and the company is already bleeding red. During Q2, the cannabis company had an EBITDA loss of $17.9 million on net revenues of only $42.0 million.
Some assets in Canada might be far more appealing now, but Tilray still isn’t intriguing with a market cap of $2.6 billion. The company still needs to show an ability to generate profits with a diverse collection of assets around the globe. Shifting back to Canada is where the bulk of their business already resides, but the move is a shift from previous plans.
The key investor takeaway is that the acquisition of Canadian assets by Tilray should catch the attention of cannabis investors. The move doesn’t necessarily make the stock any more intriguing at the current market valuation considering the large ongoing losses.
Investors should take a look at other beaten down Canadian cannabis stocks that might offer a better value than the few companies that trade on major stock exchanges at premium valuations. My view hasn’t turned bullish just yet, but the view on the Canadian sector is far less bearish now.