I’m a long-term bull on cannabis stocks. But that doesn’t mean I’m a long-term bull on every cannabis stock. Tilray (NASDAQ:TLRY) stock shows why.

After all, the potential of the cannabis market remains enormous. Admittedly, early returns have been disappointing. Canadian producers like Tilray built up too much capacity. International markets have opened up slowly. The U.S., at least at the federal level, hasn’t opened up at all.

But even if takes longer than optimists believed, the industry is going to create massive wealth. And that’s the core reason why I’m bullish on cannabis stocks, and why I offer my Cannabis Cash Weekly service.

Individual cannabis stocks, however, need to offer investors a compelling reason for ownership. After all, there are literally dozens of choices available. Given the sector’s struggles since the first half of last year, most trade significantly off their highs.

The problem with TLRY stock is that it doesn’t offer any such reason. Yes, it has fallen sharply — but, again, so have many of its peers. The question is not how these stocks have traded in the past, but how they are going to trade in the future. Tilray doesn’t give investors nearly enough to make a compelling case for upside going forward.

Earnings and Fundamentals

While stock prices in the cannabis sector generally have gone down, the industry has managed to grow revenue. Tilray is no exception.

But the growth isn’t good enough, for two reasons. First, it’s not fast enough. Revenue increased just 10% year-over-year in this year’s second quarter. That’s one of the slower rates among the major Canadian players.

On its own, that slow growth wouldn’t necessarily be a problem — if it was the right kind of growth. It’s not. Pricing remains relatively soft. As a result, gross margins, which are a problem I tagged earlier this year, continue to weaken.

Tilray’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss did narrow in Q2 against both the prior quarter and the year-prior quarter. But cost-cutting drove the improvement: Tilray took out $13 million in costs but saw its loss narrow just $6.4 million quarter-over-quarter. Even on an adjusted EBITDA basis, Tilray lost almost a quarter for every dollar of revenue it took in.

To be sure, a single quarter doesn’t define a stock. But the results get to the core fundamental issue with TLRY stock: there’s nothing distinctive. Realized pricing doesn’t suggest the company is a success with, say, branded products. Gross margins aren’t great. Tilray is losing money.

Tilray did close the quarter with $136 million in cash. But Tilray also has $480 million in debt, which is becoming an increasing concern.

Tilray still is authorized to sell $250 million worth of stock “at the market” to raise funds to pay down that debt. But $250 million is over one-third of the company’s market capitalization. For Tilray simply to survive in the near term, shareholders must face significant dilution.

The Strategic Issue with TLRY Stock

The lack of differentiation isn’t just a fundamental issue. Strategically, too, Tilray lacks a compelling argument.

What, exactly, does Tilray do well? What does the company have going for it? Those are difficult, if not impossible, questions to answer.

Its brands don’t seem to be market leaders. If they were, pricing would be better. Tilray isn’t a leading producer of cannabis, either.

The company’s medical business outside of Canada has shown some life, with impressive growth so far this year. But sales in the first half of 2020 totaled just $14 million. That’s about 14% of total revenue, and not enough to support an enterprise value that still sits over $1 billion.

Certainly, TLRY stock is cheaper than it was. The stock now is down some 97% from 2018 highs (though those highs clearly were part of a bubble that quickly burst). But, again, other cannabis stocks are down, too — and most of those stocks have clear, concise, bullish arguments.

Tilray doesn’t. In fact, it’s not even clear that the company can really participate in its industry growth. The company cut costs in Q2 not because it wanted to — but because it has to. The existing debt needs to be serviced through stock sales, which means Tilray can’t burn cash anymore.

That might sound like a good thing. It’s not. Companies in a growth market at its beginning should be spending cash as they invest in R&D, marketing, and customer acquisition. Tilray can’t do those things well, because it doesn’t have the resources to allocate.

In other words, this is a company that already doesn’t seem to do much well and is hamstrung from doing anything better. Regardless of the price, is that a company you want to own?

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