Earlier this week, one of the most highly anticipated marijuana earnings reports of the quarter hit the newswires. And while this was a report that featured a few surprises, it was the company's conference call that really packed the fireworks.
Tilray delivers the goods
On Monday, Tilray (NASDAQ: TLRY), the third-largest market cap of any publicly listed pot stock, and the very first weed company to go the initial public offering route on the Nasdaq, reported its fourth-quarter and full-year operating results. As expected, sales more than tripled to $15.5 million from the year-ago quarter, and they grew 110% to $43.1 million in 2018 from the previous year.
Image source: Getty Images.
Easily the highlight of Tilray's full-year results was the percentage of sales tied to cannabis extracts, such as oils. According to the report, 49% of total revenue was tied to extracts, which is a fantastic number considering that extracts typically bear a higher price point, and they focus on medical cannabis patients who tend to be far more willing to open their wallets and use the product more often. All in all, Tilray's focus on the medical marijuana community should lend to more robust margins on the product it is selling.
Then again, the bottom-line figure left a lot to be desired. No one was exactly expecting Tilray to turn a profit, but an increase in bulk sales really weighed on margins. Year-over-year gross margin in the fourth quarter dipped from 57% to 20%, with higher operating expenses pushing its Q4 2018 net loss up almost tenfold to $31 million. These results made it pretty evident that, even with a handful of lucrative partnership opportunities with Anheuser-Busch InBev and Novartis, Tilray isn't going to be profitable anytime soon.
Image source: Getty Images.
Did Tilray's CEO just say what we think he said?
But as I said, the actual operating results aren't the big story here. Rather, it's the commentary from Tilray CEO Brendan Kennedy on the conference call with analysts following the release of the company's fourth-quarter and full-year operating results. Said Kennedy:
Over the next 18 months, we believe there will be oversupply [in Canada], just as we have seen in certain U.S. states, as operators in new legal markets race and government regulators catch up to find an equilibrium between supply and demand. To capitalize on global growth opportunities on both medical and adult-use cannabis, Tilray will deploy capital in the most promising markets where we see the greatest potential to pursue multiple paths to grow.
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.
There's a lot going on in these two paragraphs, so let me break it down.
To begin with, we have the first real admission from a marijuana CEO that they foresee an oversupply situation on the horizon in Canada. We've been hearing cautious tales about dried cannabis flower oversupply and commoditization from industry analysts for some time given what's happened in select U.S. states. But this is the first time we've really heard a major marijuana CEO express concerns about the future supply of Canadian weed.
Image source: Getty Images.
Secondly, Kennedy does seem to pass along the vibe that he and his company are waving the white flag on Canada. To be clear, this doesn't mean that Tilray isn't going to continue to develop and sell cannabis from its just over 850,000 square feet of developed domestic cultivation space. But Kennedy's comments do assert that Tilray's long-term future ties the company more to Europe and the United States' medical marijuana markets than it does Canada, mostly because of market size.
Some people might view this as a smart strategic decision, while others could infer that Tilray was simply outmaneuvered in Canada by the likes of Canopy Growth and Aurora Cannabis. After all, in Kennedy's own words, "We believe that the field of battle has changed and that the U.S. and Europe are going to be more important over the long term."
And thirdly, this is also the first time we've really heard a cannabis CEO refer to weed supply assets in Canada as "overpriced." Yours truly has been sounding the warning on a number of marijuana deals in recent months, and it would appear from Kennedy's comments that Tilray hardly views any producing assets in Canada as being attractively priced, relative to the opportunity within the country.
Or to wrap things up here: Oversupply is coming, the Canadian cannabis supply chain is grossly overpriced, and Tilray may have been left in the dust by its peers.
As a whole, I do support and understand Tilray's overseas focus, especially considering that higher-margin medical marijuana patients, and not casual cannabis users, are its priority. But playing the waiting game on Europe and the U.S. won't be the company's fastest path to profitability, and that may not sit well with shareholders in the meantime.
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