One year ago, investors would have been content with having Tilray (NASDAQ:TLRY) post positive quarterly revenue. So, when Tilray posted a 126% year-over-year (YOY) revenue gain ($52.1 million), eager cannabis investors might expect TLRY stock to be soaring.
But it’s not. While the stock is moving off its March lows, that’s a feature of the entire sector. It’s not unique to Tilray. And Tilray’s growth in relation to the rest of the industry is not exceptional.
This doesn’t mean you should ignore the growth in TLRY stock. It just means that you have to see it for what it is. It’s perhaps, as Will Ashworth suggests, an early indication that the marijuana sector is finally starting to come to life. But unless Tilray can stop burning through cash and continue to increase revenue, there are better options in the marijuana sector.
Tilray’s Results Were Solid, But Not Special
Tilray’s May earnings call was filled with a lot of hope. The company rightfully took a victory lap for the way it managed to post a 126% YOY gain in revenue. It also pointed out that for the first time ever, international revenue for its medicinal marijuana segment outpaced Canadian revenue. And the company was hopeful that trend would soon extend to its recreational marijuana segment as well.
For investors that are starved to hear about company’s posting positive revenue, that report should have been enough to send TLRY stock soaring. But instead, the company’s stock is basically flat since the earnings report, and still down roughly 50% for the entire year.
There’s a reason for that. The company may be starting to see the long-anticipated growth in revenue as the Canadian market is now becoming established. However, the only thing exceptional about the company’s earnings report was a net loss of $184.1 million.
Investors Are Craving More from Marijuana Stocks
In 2018, marijuana stocks took off like a rocket. Basically, any company that said they were growing, distributing or marketing cannabis was going to see its stock price go up. But as the promise of cannabis failed to meet the reality of the industry’s obstacles, investors started to look at the company’s bottom lines.
Tilray was burning through cash then, and the company’s bottom line is still in trouble. Despite the boost in revenue, Tilray reported a net loss of $184.1 million. That was almost a 600% YOY increase over the $29.3 million it reported in 2019.
There were some one-time issues associated with that net loss, but the bottom line is pretty simple. The company has a lot of expenses (marketing, etc.) that they will continue to incur. And that means that the company will need to see revenue continue to grow significantly.
And for Tilray, that means threading a pretty thin needle. This is because of the way the company approaches the supply and demand dynamics of the industry.
The Benefit and Curse of Tilray’s Asset-Light Approach
Marijuana stocks have two problems. They have too much supply and not enough demand. And that means they can’t get the price per gram down enough to keep away the black market.
This was going to be the benefit to Tilray’s asset light model. The company said they would rely less on production and more on product development and retailing. In fact, Tilray CEO Brendan Kennedy said the company only wanted to grow 5% of its product. It appeared Tilray had an ideal third way to become a profitable company.
But Tilray couldn’t help itself. In 2019, as part of the company’s $70 million acquisition of Natura Naturals, it purchased a 406,000 square-foot indoor cannabis cultivation and manufacturing facility in Leamington, Ontario. Now, Tilray is closing the facility in hopes of saving $7.5 million annually.
At first glance, that sounds rational. But a closer look at the balance sheet shows that the move is being made to prevent the company from burning cash. In 2019, the company burned $384.9 million ($32.5 million per month). The company has yet to make a profit and as of March 31 of this year, it had just under $174 million in cash on hand.
The company is pledging to cut $40 million per year. But when the company lost $71 million in just a single month in 2019 ($18 million in marketing expenses alone) it suggests that they need more than that to stop the bleeding.
This adds credence to the idea that selling the production facility may be a signal that the company may not be able to get the financing it needs in the time frame it needs it (about six months). But if it taps the equity markets for financing, it will have a negative effect on the company’s share price.
The Bottom Line on TLRY Stock
Tilray is having a rinse-lather-repeat moment that makes investors weary. And the company’s problems go deeper than its balance sheet. The company is fighting a legal battle on claims of misleading investors and potential insider trading violations.
And when you look at the company’s revenue increase, only 9% was due to increased marijuana sales. This means that the vast majority of the growth came from Manitoba Harvest, Tilray’s wholly owned subsidiary. Manitoba makes sales from hemp foods.
Tilray has too many question marks to be a buy right now. I’ll concede that some of its problems may be due to irrational expectations. But if the company can’t find a way to make meaningful trimmings to its bottom line, it’s looking more likely that Tilray may not make it through the consolidation phase.