As every investor knows by now, the cannabis market was one of the biggest disappointments in recent memory. But among the major players, medical marijuana specialist Tilray (NASDAQ:TLRY) printed some of the ugliest technicals. Indeed, the 2019 price chart of Tilray stock resembles a near-linear decline to the doldrums. That said, can its recent and dramatic resurgence lead to a sustained recovery in 2020?
Source: Jarretera / Shutterstock.com
Admittedly, relatively few investors want to hear about cannabis right now. Although its 21% move from January’s opening price is noteworthy and impressive, it doesn’t detract from last year’s painful implosion.
In 2019, Tilray hemorrhaged almost 76% in the markets. Mathematically, we’ll need to see more than a 300% move for stakeholders to break even with last January’s opener.
Thus, I can understand why observers are cynical and skeptical about the recent rally. Nevertheless, Tilray stock didn’t move on simply dumb news. Instead, Wall Street clearly approved of the underlying company’s efforts to reorganize its executive team.
Currently, Tilray’s CFO is Mark Castaneda, who will shift over to strategic business development. In his place will be Michael Kruteck, who previously held positions at Molson Coors Beverage (NYSE:TAP) and Pharmaca. Additionally, John Levin, formerly of Revlon (NYSE:REV), will join Tilray as its COO.
The hope is that the executive-level transition will spark a viable growth strategy. Plus, with Kruteck and Levin both levering substantial experience with consumer retail products, they can help maximize growth in what has been an extraordinarily challenging market.
But should you gamble on Tilray stock because of this high-level recruitment? Unfortunately, shares remain risky so they’re not appropriate for all. However, I can see a reasonable speculative case.
Inefficiencies and Tilray Stock
Although Tilray has disappointed in the markets, on the financials, it’s produced some impressive metrics. For instance, in its most recent earnings report for the third quarter, the cannabis firm generated $51.1 million, a more than five-fold increase against the year-ago quarter’s haul, which was $10 million.
Of course, net income losses widened, which worried stakeholders due to sustainability concerns. The trailing 12-month tally is at a loss of $132 million. Therefore, meaningful profitability seems a long way away.
Still, if management can provide a rational framework for continued impressive growth and eventual profitability, the stock can realistically build off its recent surge. Combined with the new blood in the executive ranks, along with potential opportunities in the Canadian cannabis market, this embattled name can legitimately surprise folks.
Contrary to commonly expressed criticisms, Canadian adult cannabis demand is robust despite ongoing supply chain issues from licensing backlogs. For instance, in calendar Q3 2019, nearly 5.2 million adults used marijuana. That’s a sizable jump from the Q3 2018 figure of just under 4.6 million adults. And it’s also a huge leap from the nearly 4.2 million adult users from Q1 2018.
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Source: Chart by Josh Enomoto
For Tilray stock specifically, the Canadian price index for medical marijuana products has not only stabilized but has increased in recent quarters. I’d expect this trend to continue moving favorably as supply chain issues and social stigmas fade.
Thus, the demand for Tilray’s products is strong, even in the saturated Canadian market. So, what’s keeping it from realizing its true potential? Again, it’s the administrative backlog that has imposed severe inefficiencies in the retail market.
The biggest example of this is the province of Ontario. Home to over two million cannabis users, Ontario only has 75 stores to serve their needs, which is simply untenable.
The Bottom Line on Tilray Stock
Building off the above point, the state of Colorado has approximately one store for every 10,000 residents. Surely, the ratio for store count per active cannabis user is much, much lower. To get the ratio in Canada in sync with reality, the government must approve far more stores than they have.
Call me an optimist but I think our northern neighbor will get the job done. Indeed, their government is incentivized to do so. The longer these inefficiencies exist, the more the black market will steal what would otherwise be taxable revenue.
Thus, the opportunity is that the markets haven’t priced in this possible trend into the Tilray stock price. Clearly, the Street still views Tilray and the marijuana sector with much skepticism. I don’t blame them. But I also believe that once these governmental and platform issues are gone, cannabis firms can finally play with a full deck.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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