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Tilray Is Creeping Into the U.S., But Its Sales Goal May Lead to Dilution

· Nov 19, 2021
Based in Canada, cannabis company Tilray (NASDAQ:TLRY) is slowly making its moves into the U.S. cannabis market. Now, it’s ready to pounce once full U.S. legalization hits. If this happens, e ...

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Based in Canada, cannabis company Tilray (NASDAQ:TLRY) is slowly making its moves into the U.S. cannabis market. Now, it’s ready to pounce once full U.S. legalization hits. If this happens, expect TLRY stock to take off.

How is this company ready to strike? For starters, back in August, Tilray bought the majority of convertible notes of a U.S. cannabis retailer called MedMen (OTCMKTS:MMNFF). The retailer has 21 licenses and 25 retail operations across California as well as in Chicago, Las Vegas and Boston. Further, the deal will give Tilray the ability to convert into 21% of MedMen’s equity in the future.

In addition to this, over the past year or so, Tilray also acquired a U.S. beverage company: SweetWater Brewing Company. It acquired Manitoba Harvest — “the world’s largest hemp food company” — as well.

Assuming it can follow through with this and with full U.S. legalization, Tilray hopes to morph into a U.S.-Canadian cannabis company. This should be a big boon for TLRY stock over the next several years. That said, the stock still faces an issue: potentially significant dilution.

Interestingly enough, in the announcement of the MedMen deal, Tilray CEO Irwin Simon made it clear that the company’s goal is to reach $4 billion in annualized revenue by the end of fiscal 2024. Since its fiscal year ends in May, that implies Tilray hopes to achieve its goal within two and a half years.

Recently, the company reported its first-quarter fiscal revenue and earnings for the quarter ending Aug. 31. For the period, revenue jumped 43% to $168 million on a year-over-year (YOY) basis. That puts Tilray on a run rate of $672 million annually. But that is before internal organic growth.

For example — assuming that quarterly revenue grows 43% annually over the next two and a half years — revenue could be 2.45 times its present $672 million. That puts it on a glide path to $1.64 billion in revenue by the end of fiscal 2024.

As you can see, this still leaves a lot of room for the company to grow by acquisition. I suspect that Tilray will continue to move down this path with larger and larger company purchases over the next two years. Just to get to $4 billion, it will have to acquire at least $2 billion in revenue from existing cannabis or related companies.

In addition, analysts expect revenue of just $990.7 million by May 2023 and $1.08 billion by May 2024. That is a long way off from $4 billion. In other words, expect to see many acquisitions, especially if the U.S. cannabis market opens up on a federal basis.

Currently, the average price target on TLRY stock for 15 analysts on Wall Street is $14.22 per share, according to Seeking Alpha. That is roughly 15% higher than the Nov. 17 close price of $12.34. In other words, analysts seem to believe that the stock will have a mediocre return over the next year.

Moreover, Tipranks indicates that 11 analysts who have written on TLRY stock in the last three months give it an average price target of $13.54. That represents just under 10% upside for the stock, even lower than the Seeking Alpha survey.

As it stands, without the company getting to $4 billion in revenue by fiscal 2024, TLRY is not that expensive. The value metrics for the stock are 5.77 times sales for the year ending May 2023. And for May 2o24? Given its $5 billion market value today, Tilray trades for 5.28 times May 2024 revenue of $1.08 billion.

This shows there is room for the stock to rise, especially if it’s able to make over $2 billion in revenue run rate acquisitions over the next two years. However, don’t be surprised if the company uses equity shares to pay for those acquisitions. This is because, as of Aug. 31, it had just $376.3 million in cash on the balance sheet. If Tilray has to issue $2 billion or more in shares, it could lead to substantial dilution — more than one-third of its current stock market value.

That might not lead to a higher stock price, even though the company will have higher revenue. As such, cautious investors should wait to buy TLRY stock for the time being.

On the date of publication, Mark R. Hake 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.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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