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In potentially terrible news, Canadian cannabis producer Tilray (NASDAQ:TLRY) saw its stock fall by almost 7% on Nov. 10. Except for the energy sector in 2020, I don’t think there is any sector of the economy that’s suffered as many setbacks in recent years as the cannabis industry. But don’t count TLRY stock out yet, its still budding.
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The most recent punch to the gut was the news that the potential legalization of cannabis at the federal level in the U.S. would come with a 3.75% excise tax on all cannabis sales on top of the existing state taxes. If so, Tilray and all the other companies with dollar signs in their eyes will have to work much harder to deliver consistent profits for their shareholders.
In mid-October, I suggested Tilray was a buy around $10. But only for aggressive investors. While the news that the Federal Government is looking to cash in on the “Great Cannabis Bonanza” shouldn’t come as a surprise to anyone in the industry, it’s another reminder that investing in cannabis is not a slam dunk.
So, where does this leave a company like Tilray?
TLRY Stock Stuck Below $12
Since September, Tilray stock has gotten near or broken through $12 on three occasions, only to fall back into the $10’s each time. The latest setback saw TLRY stock close Nov. 9, trading at $12.38, open Nov. 10 at $11.99, and then close the day at $11.52. That’s a price drop of 6.95% in just a day.
On Sep. 14, TLRY closed below $12 for the first time since early January. Since then, it’s closed below $12 in 34 of 41 days. The threats of an additional tax have investors worried about the future.
That’s the latest setback for anyone looking to capture a big piece of the American cannabis pie.
But as I said in October, if CEO Irwin Simon has to keep taking out smaller Canadian producers to get to its 2024 goal of capturing a 30% market share in Canada, then that’s precisely what it will do.
If you own TLRY stock, you can take solace because it is one of the leading players in the Canadian market. South of the border in the U.S., it is taking baby steps towards doing the same in the American market.
I believe Simon’s hell-bent on proving he can build a second large business — the first being Hain Celestial (NASDAQ:HAIN), which he left unceremoniously in 2018 after 27 years as CEO — only this time with a better ending.
Can It Survive Without the U.S. Market?
InvestorPlace’s Josh Enomoto recently recommended that owners of TLRY stock shouldn’t bet on the U.S. legalizing marijuana.
While I disagree with my colleague’s assessment of the situation — I believe the tax dollars are too hard to ignore — it does make me wonder if Simon could build a global business without America in play.
Now, to be clear, it is already generating revenues in the U.S., albeit from non-cannabis sources such as Sweetwater Brewing and Manitoba Harvest. In addition, it has a potential 21% ownership stake in Los Angeles-based MedMen Enterprises (OTCMKTS:MMNFF) should cannabis become federally legal in the future.
But Europe remains its next best hope after the U.S. Tilray Europe operates two state-of-the-art GMP (Good Manufacturing Practice) facilities in Portugal and Germany. In addition, its CC Pharma business enables it to distribute medical cannabis in Germany and throughout the European Union.
On Oct. 26, the company announced that the Luxembourg Ministry of Health had selected it as a supplier for its medical cannabis program. Simon stated in the press release:
We believe that Tilray’s growth potential in the European Union represents a $1 billion opportunity, and today’s announcement affirms that we are turning potential into performance. With today’s validation from the Luxembourg Ministry of Health, Tilray now offers branded medical cannabis in 20 countries around the world
The estimated European medical cannabis market is currently valued at $5 billion, growing to $13.4 billion by 2026. My best guestimate is that the company’s operations in Australia, New Zealand, and Chile probably compete for revenues worth about 10% of Europe’s potential revenues, or $1.34 billion, by 2026.
That’s a total of roughly $14.8 billion. So if Tilray can get a 10% market share from these markets, we’re talking about $1.48 billion in revenue on top of the $599 million it already has generated over the past 12 months.
TRLY Stock Can Still Grow
So, yes, it can make a go of it without the U.S. ever entering the equation.
Long-term, I remain convinced that TLRY stock will be worth far more than $12, despite the never-ending bad news that haunts the cannabis industry.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.