Tilray (TLRY) Finally Boosts Production, but Creates More Questions Than Answers

It’s been nearly 10 months since the roller-coaster ride began for Tilray (NASDAQ:TLRY) investors.

The bigger they are…

On July 19, following a list price of $17, which saw Tilray raise more than $170 million, the “Legend of Tilray” was born. This highly popular medical cannabis brand was expected to be a clear-cut rival to the early dominance of Canopy Growth and Aurora Cannabis, with the capital it was raising from its initial public offering on the Nasdaq expected to provide a means to greatly expand its production capacity, as well as push into foreign markets.

Be it some combination of the company’s low initial float — private-equity firm Privateer Holdings owns more than three-quarters of Tilray’s outstanding shares — or the high expectations surrounding its early success on the medical cannabis side of the equation, Tilray’s stock was pumped from its $17 list price to an intraday peak of $300 in less than two months.

The future looked bright for what had briefly become the largest marijuana stock in the world by market cap. Tilray had approximately 850,000 square feet of devoted cultivation space throughout three grow sites in Canada, and it would go on to add 250,000 square feet in Europe, bolstering its cultivation capacity to about 1.1 million square feet. Assuming Tilray produced cannabis at the rough industry average of 100 grams per square foot, it should have no issue becoming one of Canada’s major growers.

…the harder they fall

However, the wheels fell off the wagon almost as quickly as Tilray zoomed out of the gate. Tilray would give back two-thirds of its gains not long after its momentum-driven rally, and it would cede substantial market value following an abysmal fourth-quarter report in March.

Mind you, most marijuana stocks haven’t exactly been impressing Wall Street with their most recent quarterly results. For Tilray, its $15.5 million in fourth-quarter sales, a year-on-year tripling in revenue, and the fact that 49% of full-year sales were tied to high-margin extracts sat just fine with Wall Street. It was the company’s anemic 20% gross margin in the fourth quarter, coupled with operating losses of $22.9 million in Q4 and $57.7 million for the full year, that failed to spark investors.

But the bigger story was CEO Brendan Kennedy’s announcement that Tilray no longer viewed the Canadian market as its top priority. Categorizing the Canadian landscape as pricey, Kennedy noted that Tilray’s focus would be on the United States and Europe going forward. While the peak potential of the U.S. and EU are higher than Canada, it’s an odd strategy shift so early in the legalization process in Canada.

As detailed in the company’s press release, the biggest jump in production capacity will come from High Park Gardens in Leamington, Ontario. Though High Park has a 662,000-square-foot facility, only 155,000 square feet are operational and licensed. Part of the $32.6 million will go toward adding 127,000 square feet of additional production capacity. Similarly, Tilray’s Nanaimo, British Columbia, campus will see its footprint grow by 33% to 80,000 square feet from 60,000 square feet.

On the processing side of the equation, Tilray will be doubling the size of its High Park processing facility in London, Ontario, to 112,000 square feet from 56,000 square feet.

While this probably sounds great, it’s really a bit of a head-scratcher. You see…

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