The performance of Tilray (TLRY) stock in recent months lags behind similarly sized competitors as aggregated revenues remain low and multiple minor headwinds (such as stock-based compensation packages) subdue investor confidence. The cannabis stock more than tripled in 2018, but is down about 10% year to date.
However, the recent partnership with AB InBev has potential to open up an exciting market in beverages. AB InBev is a first-class partner that has substantial scale and expertise in producing and distributing beverages in a profitable way. With total startup capital of up to $100 million, this partnership aims to formulate a new type of health product potentially aimed at both recreational and medical users. Ambitions to develop beverages as a method of delivery that is healthier to most comparables remains generally unproven, but this format does have material upside potential and appeal for multiple types of cannabis users.
Furthermore, the acquisition of FHF Holdings in February 2019 for $419 million represents a material shift in focus towards the hemp food market, with FHF maintaining a retail network of circa 16,000 locations across NA. The acquisition is a material drain on financial resources for the company, and Tilray likely paid far in excess of FHFs book value. 2019 will remain pivotal for FHF as its effect on Tilrays wider performance will be a key driver of Tilrays stock price moving through the year. The opportunities to add material revenues in a profitable way could go a long way in soothing investors looking ahead.
The R&D arm of Tilray is operating a number of trials that present potential opportunity by way of IP, with the ambition of medical authorization for a range of products including the chemotherapy-induced nausea and vomiting trial.
(Source: Tilray Annual Report, 2018)
It is worth pointing out the majority of these trials consist of early phase data to support applications of patents and exploration for future studies. This is a high-risk long-term play on developing protected products that can be later exploited via licensing or direct production and distribution.
Finally, stock-based compensation plans remain largely excessive sector wide. In the case of Tilray, this includes a $20.98 million charge on a full year 2018 revenue base of $43.1 million. This level of executive compensation is likely to destroy more shareholder value than it creates over short to mid-term time horizons.
As of 31st December 2018 Tilray, maintained cash and cash equivalent assets of $487 million, with this latest acquisition of FHF representing about 75% of available cash on hand being utilized and spent as of February 2019. This does raise questions as to how capex will be funded moving forward, as well as convertible senior notes due in 2023 which stand as a liability of $420 million, though it should be clarified that it is likely that these notes will be converted into shares, and thus will not represent a material cost to the company balance sheet upon conversion.
Tilray have a few key drivers for adding value for investors over the course of 2019. FHF clearly gives it major inroads into the hemp food business, adding immediate revenues and possibly a small profit which should increase short term market sentiment.
And what if Tilray is able to execute well on the beverage side? I see an exciting upside for that segment, with Tilray leading the charge with a great hand to play moving through the year ahead.
Finally, while the R&D prospects are “nice to have”, I don’t see it as adding a much short to mid-term value, and it’s a moon shot as to it’s long-term potential.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no position in TLRY. The information contained herein is for informational purposes only.
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