Consumer Products

How Safe, Legal Pot Boosted Tilray Stock in COVID-19 Era

Canadian cannabis company Tilray Inc. (NASDAQ: TLRY) has turned around in recent weeks. While the stock is down 50% year to date, it’s up 26% for the last month. It’s been a volatile year for marijuana stocks so far.

Tilray closed at $8.16 Tuesday, up 2.51%. The S&P 500 closed down 1.05%. Tilray’s consensus 12-month price target is $17.88.

Sales Get Higher

Tilray saw increased revenues in the first quarter thanks to growth in its medical cannabis, Canadian adult use and hemp lines. The company reported revenues of $52.1 million, up from $23.4 million in the year-ago period.

The coronavirus pandemic hasn’t put a dent in Tilray’s sales thus far. In a call with analysts last week, the company noted that Canada, Germany, Portugal, Australia and multiple U.S. states have deemed legal marijuana “essential businesses,” which allows retail sales to proceed. “This validates our thesis that cannabis is a mainstream product consumed by mainstream patients and consumers,” said CEO Brendan Kennedy.

The chief executive argues that cannabis is a counter-cyclical product. “We believe that this pandemic will demonstrate that legal cannabis behaves more like a consumer staple,” he said. “In other words, things people need, rather than indulgent items such as luxury products.”

If that’s true, the second quarter could be very positive for the cannabis industry. Counter-cyclical goods by definition perform better during market downturns.

Competitor Aurora Cannabis (NYSE: ACB) recently beat earnings expectations by a wide margin. The company’s net revenue for the third fiscal quarter was C$78.4 million. Analysts had been expecting C$66.7 million. Its revenues were also driven by increased sales.

Could the pandemic boost legal pot sales? “One could argue that Canadian consumers are, at the time of COVID … more interested in obtaining a product from a licensed retailer” than from the black market, Kennedy said. “I think as people are concerned about quality and safety, I think that COVID may lead to a faster migration of Canadian consumers from the illicit market to the legal market.”

Tilray doesn’t sell recreational pot in the U.S. but the sales trends here offer clues for all pot businesses. Washington state hit a new monthly sales high of $106 million in April, according to Headset, a Seattle firm that tracks the marijuana business.

But California, Colorado and Nevada saw sales drop from the previous month. Nevada is likely to be hard hit since tourists vanished during the pandemic.

The current economic crisis is the first one faced by the fledgling marijuana industry. Remember that legal recreational sales started in Washington and Colorado in 2014. Experts in the U.S. and Canada will be watching to see if pot consumers consistently want high times during hard times. Kennedy thinks the Canadian recreational market could double in 2020 — if retail stores reopen on a wide scale.

Before COVID-19 hit, Tilray had a plan for moving toward profitability. The company says it’s still on track to reach $40 million in annual cost savings this year.

“The COVID-19 pandemic provides a level of uncertainty for Tilray and the broader industry,” Kennedy noted. “That said, based on what we know today, we believe that this goal is achievable and we are executing accordingly.”

Cannabis Banking

Of interest to the entire industry is a move by Washington last week that could solidify the notion of marijuana as a normal, legal business. The House of Representatives included so-called “cannabis banking” in its $3 trillion coronavirus stimulus bill.

If passed, the provision would clarify that banks can service legal marijuana businesses without fear. Large banks in the U.S. have avoided cannabis companies since the drug is still illegal federally.

The Senate has not taken up the House measure, and Sen. Majority Leader Mitch McConnell objected to the cannabis banking provision.