Marijuana stocks have enjoyed a big recovery since March. Yes, that’s true of much of the stock market in general. However, marijuana has done particularly well. Sales held up alright despite the lockdowns, and demand seems to be surging in some markets now as more stores reopen. Throw in sentiment that had been in the dumps and is now improving, and the pieces are in place for a big rebound in cannabis stocks. Tilray (NASDAQ:TLRY) stock has tagged along for the ride, with shares as much as quadrupling off recent lows.

I recently explained why the worst is over for Canopy Growth (NYSE:CGC) stock. So, don’t get the idea that I’m against the rebound in the cannabis space in general. However, Tilray is still in difficult position. In fact, its most recent quarterly report showed a company that is struggling to stem its massive operating losses. While the company has enough cash to make it for a little while, the clock is ticking for Tilray.

The Math for Tilray Still Doesn’t Compute

In the company’s latest earnings report which came out last month, the company showed improvement. A quick glance at the headlines shows significantly rising revenues and laudable efforts to cut costs. It seems like good news. And indeed, things are slowing moving in the right direction.

However, Tilray has a massive amount of work to do to reach profitability. Let’s take a closer look at those quarterly results. For the first quarter, Tilray pulled in $52 million of revenues. It spent $37 million on direct costs to produce that cannabis, and it rang up another $4 million in costs due to inventory adjustments on already in-stock cannabis. Thus, it earned a gross profit of $11 million on cannabis production.

That doesn’t even come close to covering Tilray’s other costs, however. Tilray spent $18 million on general and administrative costs — the basic overhead of running a public company. It spent another $18 million on marketing. There was another $1.3 million for research and development, and $8 million on top of that for stock-based employee compensation. And the line items go on.

All in all, despite earning a gross profit of $11 million from cannabis operations, Tilray managed to lose $71 million overall for the quarter. This is truly a horrifying figure, considering that they only generated revenue of $52 million. Thus, they’re losing more than a dollar overall per dollar of revenues they bring in.

Tough to Grow Out of This Mess

The thinking is that, with time, Tilray will grow revenues enough to offset these other costs. But is that realistic? Again, consider that they spent $18 million on sales and marketing alone last quarter while producing a mere $11 million of gross profit. This is inherently not a good business at this time, and there’s little proof that it will scale up soon either.

For the same quarter last year, Tilray generated $23 million in revenue. So that surge to $52 million for Q1 2020 may seem nice. On the other hand, in Q1 2019, Tilray only lost $28 million. This year, they lost $71 million in the same period. Losing more money the bigger you get is not necessarily a great outcome for shareholders.

Tilray is promising cost savings, suggesting it can curtail $40 million of spending annually, or $10 million per quarter. That would be a solid development. And management is making the right moves, such as shutting down redundant production facilities to lower costs.

However, $40 million per year is still not going to materially turn things around for a company that just lost $71 million in a single quarter. They need an exponential surge in revenues or a massive cost cutting regimen.

The Verdict on TLRY Stock

Tilray is not in imminent danger of going bust, as many other companies are thanks to the pandemic. So, I understand why traders have moved back into Tilray. As of March 31, the company had $174 million in cash on hand, which was about equal to its total current liabilities of $171 million. This means that while Tilray isn’t on great financial footing, it has some time to try to formulate a turnaround.

That said, I ran through the operating figures above, and they’re pretty grim. The company isn’t close to an inflection point. Rather, it needs a massive surge in revenues or to take a hatchet to expenses to make this into a break-even let alone significantly profitable business.

Tilray stock still has some value as a proverbial call option on a potential revival in the marijuana space. But don’t forget that TLRY stock fell to $2.43 during the March crash. Yet it’s back above $8 now. Traders are arguably much too optimistic here given the sour financial picture. Tilray’s next move is likely to the downside.

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