Here’s Why Europe Probably Won’t Save Tilray’s (TLRY) Stock From Free-Fall
Canadian cannabis producer Tilray Inc. (NASDAQ:TLRY) is betting big on Europe becoming the largest end market for medical marijuana. Armed with a research and cultivation facility in Portugal, the company believes it’s in prime position to capitalize on government-subsidized healthcare systems as cannabis treatments gain mainstream acceptance across the European Union (EU).
The problem: Tilray continues to hemorrhage money and its stock is in free-fall.
Tilray Stock Goes Boom and Bust
Very few stocks demonstrate the boom-and-bust nature of marijuana investments quite like Tilray. The stock is in the process of completely reversing all of the gains made through the second and third quarters of 2018, where it would eventually peak at $300.
On Friday, TLRY closed at $43.59 a share. It traded as low as $42.81 on July 18.
Peak-to-trough, Tilray’s stock has plunged by 85%. By comparison, the Canadian Marijuana Index is down 55% from its September 2018 peak. Tilray is among the 23 companies listed on the Canadian Marijuana Index.
At current values, Tilray has a total market capitalization of $4.2 billion. Tilray’s revenues more than doubled in 2018 but the company still reported a net loss of $67.7 million.
Tilray’s 110% annual revenue growth will need to be maintained for a long time before it can ever become profitable. The company finished the year with $487 million in cash and cash equivalents. At those levels, it only has a few more years to generate positive cash flows.
Betting on Europe
After two years of research, Tilray finally settled on Portugal for its European cultivation facility, investing $22 million in a 2.4 hectare location just outside of Cantanhede. Clearly, Tilray is looking at a future where Europe will be the dominant market for legal marijuana sales, especially in the medical category.
“We expect the European Union to become the largest medical cannabis market in the world,” Tilray said in a statement, according to Fortune. “And we expect this to be driven by the availability of medical cannabis through government-subsidized health care systems.”
But entering the European market is easier said than done. Marijuana laws across the continent are highly fragmented and inconsistent. Medical marijuana is legal in Germany, Italy, the United Kingdom and Portugal, but remain illegal elsewhere.
Beyond medical cannabis, the picture looks bleak. That’s because most Europeans live in regions where possession and consumption have already been decriminalized. The pent-up demand for recreational cannabis that companies like Tilray are anticipating might not be there.
All things considered, marijuana investors should tread carefully around Tilray. Being an observer instead of an active participant is probably a good idea.
The stock was recently downgraded from ‘hold’ to ‘sell’ by Zacks Investment Research. The growing prevalence of insider trading is also a concern after it was confirmed that the company’s CEO, CFO and chief revenue officer all unloaded some of their holdings.
Featured image courtesy of Shutterstock. Chart via Yahoo Finance.