Tilray’s share price lights up on diversification strategy

Tilray’s share price has lit up over the past month thanks to stronger-than-expected fourth quarter results, and its diversification into the beverage market. That strategy continued this month with the Canadian cannabis producer taking full control of Truss Beverages Co. and inking a deal with Anheuser-Busch InBev [BUD] to buy eight of their beer and beverage brands.

• Tilray’s share price burns 66% higher over the past month.
• Diversification strategy continues with takeover of Truss Beverage Co. and Anheuser-Busch InBev deal.
• Revenue up 20% in the fourth quarter.

Tilray’s [TLRY.TO] share price burnt higher this month as the company continues to diversify. Last week the Canadian cannabis producer announced that it has acquired the remaining 57.5% equity ownership of Truss Beverages Co. – a producer of non-alcoholic, cannabis beverages in Canada.

Tilray said the acquisition would strengthen its market position and bolster its platform of cannabis-infused beverage brands.

The deal follows on from an agreement with Anheuser-Busch InBev [BUD] to buy eight of their beer and beverage brands. Tilray said that the deal would expand sales volumes and elevate it from the fifth-largest craft beer producer in the US.

“With this transaction, our beer business is expected to triple in size from 4 million cases to 12 million cases annually,” said Ty Gilmore, President of US Beer at Tilray Brands.

The all-cash deal with AB InBev is expected to close at the end of 2023. Chairman and chief executive of Tilray Irwin Simon remarked that it would solidify Tilray’s market share in the US craft brewing scene and was a “major step forward” in the company’s diversification strategy.

What’s happening with Tilray’s share price?

Tilray’s share price has torn 66% higher over the past month, scorching the Global X Cannabis ETF’s [POTX] modest 11% gain.

Lighting up the stock were better-than-expected fourth quarter (Q4) results published at the end of July. Gross profit came in at $67.1m, reversing a $6.7m loss the same quarter the previous year. Revenue rose 20% to $184m. For Tilray’s full year ending March, gross profits grew 26% year-on-year to $147m, while revenue rose 6% to $668m.

Also boosting the Tilray share price this month is the German government’s approval of legislation to allow some recreational drug use in the country. The new law paves the way for adults to buy and possess up to 25 grams and to cultivate three plants at home. The legislation still faces a vote in the German parliament and has drawn backlash from conservative critics.

Tilray looks to tap diversification to grow revenue

Cannabis and distribution remain Tilray’s biggest businesses, accounting for just under three quarters of total revenue in Q4. However, cannabis sales are still banned at a federal level in the US.

To gain a foothold in the US Tilray has diversified its portfolio through the purchase of craft beer companies, something that Forbes contributor Hudson Lindenberger believes has now put Tilray “firmly on the national stage” in the US. Lindenberger points out that the AB InBev deal is part of Tilray’s strategy to aggressively enter the US alcohol market.

Along with the AB InBev brands, Tilray already owns several breweries including Sweetwater Brewing Co., Montauk Brewing and Alpine Beer.

In July, Irwin Simon said that he was “focused on acquisitions within the beverage industry”. Simon believes that beverages could be a $300m business for Tilray.

The diversification strategy is now meaningfully adding to Tilray’s top-line numbers. In Q4 Tilray’s alcohol net revenue rose 18% to $32.4m, up from $22.7m in the same period the year before, and representing 11% of total revenue. For the full-year, net revenue for beverages increased 33% to $95m. Beverages are also a high-margin product, with Tilray reporting gross margins of 49%.

Where next for Tilray’s share price

Despite the better-than-expected Q4 numbers, analysts at TD Cowen, Piper Sandler and Alliance Global Partners all trimmed their price targets following the results.

Piper Sandler lowered its price target from $3 to $2 – the same move as Alliance – saying that cannabis stocks continue to trade off US regulatory expectations and that a catalyst for change may be some time coming.

TD Cowen lowered its price target from $5 to $3, noting that Tilray’s full-year sales had come in ahead of expectations.

Among the analysts, Tilray’s share price has a $3.93 12-month median price target. Hitting this would see a 9.2% upside on Friday’s close of $3.6.