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Tilray (TLRY): The Importance of Global Markets

A lot of the Canadian cannabis LPs shunned the U.S. for global markets and the riches of major stock exchanges. The plan hasn’t really played out as the U.S. market surges into the billions and the global markets sputter around. The Tilray (TLRY) medical cannabis export agreement is one of the first signs of real revenues and also a sign of how far the global markets have to still go.

Germany To The Rescue

Tilray signed an agreement with Cannamedical Pharma GmbH for an initial supply of $3.3 million in medical cannabis for German patients. Tilray recently completed a 250,000 square feet campus in Portugal to supply European patients such as these in Germany.

Cannamedical has a distribution network of 2,500 pharmacies and clinics in Germany. The deal is a wholesale supply and apparently the Germany company will sell the Tilray cannabis under their brands.

The company predicted shipping the order in fall 2019. The news is positive for Tilray considering that Q2’19 medical cannabis declined from Q2’18 levels to only $9.1 million. The international medical cannabis was still an after-thought business with sales of only $1.9 million. In essence, Tilray can split this order between Q3 and Q4 and roughly double quarterly international revenues.

Medical cannabis typically has higher price points, but the deal is for a wholesale supply, so the financial metrics are very unclear.  The Canadian cannabis company doesn’t breakout operations at the international level other than sales amounts.

Underwhelming Deal

For some reason, the stock jumped 10% on the news of a deal that amounts to a $1.65 million quarterly increase in sales. The number is material to the internal business, but the stock now has a $3 billion market cap on a deal that amounts to minimal revenue gains for a business with $42 million in quarterly sales.

Analysts were already forecasting sales to grow roughly $10 million sequentially over the next couple of quarters so this deal may just fold into existing expectations. After all, the Tilray Portugal facility received in May a standard manufacturing license and a GMP certification in accordance with EMA standards to allow export to European medical markets.

To support the $3 billion market valuation, investors better hope that more international deals are on the way. Brightfield Group has the Germany medical cannabis market targeted at $2.7 billion by 2023, but all of the major Canadian cannabis players like Canopy Growth (CGC) and Aurora Cannabis (ACB) are already in Germany. Even just 10% market share by Tilray would lead to $270 million in sales in four short years, but the market is highly competitive already.

Takeaway

The key investor takeaway is that Tilray and the other large Canadian LPs bet big on the global markets that haven’t paid off yet. The Germany deal for a minimal $3.3 million in cannabis sales actually highlights the problems facing the sector. The company didn’t build up the European facilities such as the Portugal complex for a million-dollar deal, but clearly Tilray doesn’t have any bigger deals to announce.

The stock is already giving up the intial stock gains, but any other more material deals in Europe would potentially turnaround the stock from a brutal year.

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Disclosure: No position.