It is clear that Tilray will need to expand its production capacity to meet its long term goals. In June 2018, TLRY successfully completed its IPO to fund the development of cultivation and processing capacity. Additionally, the IPO net proceeds are to be utilized for future acquisitions and for repaying outstanding debt. In the domestic market, TLRY will be facing tough competition from Aurora Cannabis and Canopy Growth, its key industry rivals, that are much bigger companies based on marijuana production and revenue.
Being established players, Aurora Cannabis and Canopy Growth have made significant investments in cannabis production and their production capacities will give them an edge while winning more market share in Canada’s legal cannabis market. Both these rivals are production powerhouses in comparison to TLRY and their size advantage is significant. By next year, Aurora Cannabis and Canopy Growth will have production capacities of about 570,000 kilograms and 500,000 kilograms respectively.
Currently, TLRY operates four facilities that make up 912,000 square feet of space and the company is making efforts to ramp up its production. Earlier TLRY had announced its plan to scale up its production capacity to only 150,000 kilograms by the end of 2019. Even though it has fully-funded plans for facility expansion, TLRY’s annual cannabis production will be less than one-third of the production figures reported by Aurora Cannabis and Canopy Growth. As of now, it is a big challenge for TLRY to optimize its production capacity to match with its rivals’ production capacities
Clearly, TLRY’s main rivals are in a better position to meet an increased demand. Moreover, the rival companies are also producing alternative cannabis products like oils and extracts. So TLRY will need to fiercely compete with its rivals on a number of fronts. Even though TLRY’s year-over-year revenue increased by 95% in the second quarter, its revenue still trails Aurora Cannabis and Canopy Growth. TLRY is still reporting loses despite being fully-funded for additional domestic and global expansion. Tilray also announced a net loss in the second quarter of $12.8 million, compared to a net loss of $2.4 million in the prior-year period.
Apart from rivalling with industry rivals, TLRY will also have to compete with other established adjacent industries like pharmaceuticals, alcohol, tobacco, and consumer products. It is highly likely that these industries will have an interest in entering the domestic market for marketing cannabis-infused products. In addition to possessing mature infrastructure, these companies have greater access to capital infrastructure and better brand recognition. Moreover, these rivals have the knowledge of operating in a highly regulated environment.
It is clear that players in the legal cannabis market are facing an uncertain operating landscape as rules and regulations that govern the industry are still evolving. There still exists a large amount of uncertainty surrounding the Canadian cannabis market. Moreover, there is a cloud of uncertainty around the United Nations drug control conventions. It is difficult to ascertain the actual number of countries which will legalize medical cannabis and make a move against the international drug control regime. The cannabis industry has high entry barriers and the capacity to meet consumer demand is still unknown. Maturity levels of various licensed producers (LP) differ drastically. As the industry is still developing, many organizations are still in their nascent stage of growth. Moreover, it is challenge for LP’s to raise capital for supporting the costs of increased production and without compromising margins. In the long run, market consolidation might take place and there will be a few major players that will dominate the market.
TLRY might be well-positioned to pioneer the development of the global medical cannabis market but it still does not have the necessary production capacity to emerge as a market leader in the global cannabis market. TLRY’s Q2 results indicate a strong growth in sales as well as the 75.2% revenue growth over the same half last year. the company has strong cash position and it has sufficient cash to invest in future. As of June 30, 2018, TLRY has reported cash and cash equivalents totaling $25.3 million which is sufficient to fuel long-term growth. However, evaluating a stock solely on the basis of the company’s cash position will lead to delusional projections and gross overvaluations.
There are a few critical factors that need to be considered before accurately projecting TLRY’s stock price. Firstly, the US federal government is yet to legalize medical and recreational marijuana throughout the country. The legalization of cannabis by US federal government will not only throw open one of the largest and fastest growing cannabis market but also expose TLRY to competitors within the USA. The opening of the US market will lead to a market correction as the true picture of the market will be revealed. Secondly, TLRY’s ramping up of production facilities is still going on, hence it is very difficult to forecast TLRY’s stock price movements based on its prospective earnings. This is an important factor that can slow the stock’s momentum down. Instead of being too bullish about TLRY, investors need to look at the big picture and avoid falling into a ‘momentum trap’.
Otherwise, TLRY is stock that has a long-term potential to provide substantial returns to the investors. More specifically, TLRY stock is for investors who are willing to stomach some risk while garnering strong potential returns in the long run. The company has a culture of execution which has played a key role in its strategic success and which will enable the company to achieve its long-term goals.
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