Canada-based Tilray (NASDAQ:TLRY) has been a disappointment among marijuana stocks, falling at one point to less than $3 per share. Even after a solid bounce, TLRY stock still is down more than 40% year to date.

By comparison, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), a marijuana-themed exchange-traded fund (ETF), is down about 12%.

Now that Tilray is back in double digits, I believe short-term profit-taking in the shares is likely as global equity markets may once again become more risk averse. Let’s take a closer look.

Tilray Earnings at a Glance

On May 11, Tilray released Q1 results. Management divides revenue into cannabis (about 60%) and hemp (about 40%). And the group has three segments of cannabis revenue:

  • Adult-use (i.e., retail recreational in Canada) – about 68% of cannabis revenue.
  • Canada (medical) – about 13% of cannabis revenue.
  • International (medical) – about 19% of cannabis revenue.

Revenue increased 11% compared to the fourth quarter of 2019. Investors cheered the increase. Growth was driven by a 23% increase in adult-use sales and a 14.3% increase in hemp product sales.

Yet unprofitability has become the norm in the cannabis sector. And Tilray’s net losses widened to $184.1 million, or $1.73 per share. It also recorded another quarter of negative EBITDA. Management said the goal is to reach positive EBITDA by the end of 2020. Most investors realize that would be an over-ambitious aim.

The company has a cash balance of $167 million. Assuming sales numbers continue to come in as expected, it should be able to maintain production without much financial difficulty in the rest of the year.

InvestorPlace contributor Will Ashworth has written in detail about other metrics in the Q1 results. He concludes:

“If you’re an aggressive investor, TLRY stock is worth considering despite the significant GAAP loss in the first quarter. However, don’t be putting it in a tax-advantaged account. This is for your fun money.”

I also agree that Tilray stock is more appropriate as speculation. For TLRY stock to have a sustained rally that will keep it in double digits, it will need to deliver strong fundamental results in upcoming quarters.

2 Long-Term Headwinds for TLRY Stock

Cannabis is an agricultural commodity. Marijuana is an agricultural commodity whose production is capital-intensive. Pot firms, not unlike modern farming businesses, have had to make substantial initial and ongoing investments. Tilray and its peers are operating in an expensive commodity-based consumer market.

As a result, the Canadian cannabis industry has been struggling with supply-chain and debt issues.

In late 2018, during the early weeks following legalization, Canadians spent about $40 million on legal weed. It was rather easy to buy into prospects of a bright future for weed stocks like TLRY.

However, since then legal recreational pot sales have been treading water. On the other hand, the black market is still thriving in Canada. How can a producer like Tilray can maintain high margins in an industry that does not have meaningful growth levers?

Tilray trades at a price-sales ratio of 5. Although that number is much lower than 500 it had seen in September 2018, it is still rather high for a company that does not have a realistic path to sustained profitability in the short run.

U.S. federal legalization may not yet happen. Investors realize that it is still too soon to count on federal legalization to happen in the U.S. And other international sales outside Canada and the U.S. are not big enough to act as a substantial catalyst for the share price of Tilray as well as other pot stocks.

Big international expansion dreams for most pot stocks are at an end. Therefore, in the coming quarters, we are likely to see the industry in Canada to consolidate further and eventually to stabilize.

However, such consolidation may not necessarily be bad for the industry. After all, both the retail and the medical markets globally are likely to grow, albeit at a moderate pace, in the coming decade. As edibles and sodas hit the shelves, established cannabis groups with a range of product offerings may catch a new tide of optimism. Nonetheless, investors should be cautious about the growth potential of Tilray and hence its stock price.

Tilray’s Recent Price Action

Prior to the earnings release, TLRY stock was around $8. The next two days, it fell to $6.65 on the headline news. Then a fast rally kicked in and on May 26, it hit a recent-high of $11.60. Now, it is around $10.20.

Put another way, Tilray is a highly volatile stock that gets a lot of short-term trading attention. Therefore, long-term investors would need to proceed with caution.

The current share price of Tilray means an increase of about 300% from lows seen in March 2020. If you had been brave enough to buy TLRY stock around the 52-week low of $2.43 hit on March 18, you’d be rather pleased right now.

Yet if you have been a long-term investor in the cannabis stock, you probably still remember the day in July 2018 when it became the first cannabis stock to list on Nasdaq composite at an IPO price of $17. Then in September 2018 it hit an intraday all-time high of $300. That price marked the day of extreme exuberance in cannabis space and will possibly stay in memory’s rearview mirror.

That was then; this is now.

Although long-term investors would like to see TLRY stock stay over $10 in the coming weeks, short-term traders are likely to keep the price between $8 and $10. From a valuation standpoint, the stock is not necessarily a bargain at $8, either.

Investor Takeaway on TLRY Stock

Since the lows seen in mid-March, TLRY stock has roared back. However, that increase does not necessarily mean the shares will someday go back to triple digits again. Over the past year, rich valuations in the sector have taken a major hit. And most cannabis stocks like Tilray have fallen far from grace.

Almost two years into legalization, the Canadian market is still struggling. International markets, including the U.S., are not likely to develop much further any time soon. So long-term investors are even wondering which of the cannabis stocks may survive the next few years.

If you are already a shareholder who has paper profits since mid-March, then you may want to realize some of these gains.

Alternatively, you may also consider hedging your position with covered calls. For example, July 17 expiry ATM calls would decrease portfolio volatility and offer investors some downside protection. It’d also enable investors to participate in a potential up move.

At this point, I do not regard TLRY as a long-term investment. It’ll likely continue to trade on short-term sentiment in the foreseeable future. I’d not currently pay a premium to invest in this company.

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