Tilray (NASDAQ:TLRY) stock once traded at over $300 during an intraday session back in September 2018. Even though it hasn’t been two full years, it seems like eons have passed since that time. Last Friday, TLRY stock settled at $9.85 per share. To put things in perspective, that’s an almost 97% drop from its all-time high.

How did things turn so pear-shaped for the stock? Well, a composite of factors helped create a perfect storm for the Canadian pharmaceutical and cannabis company.

Operating metrics for the company are down, and cash burn is up. Meanwhile, Canada’s cannabis market has been undergoing a bit of bubble bursting for a while. Valuations are returning to earth after skyrocketing from weed’s legalization in 2018. Evidence of that softness was on full display when Canopy Growth (NYSE:CGC) reported a fiscal fourth-quarter net loss of $1.33 billion last Friday. TLRY stock tanked 7% as a result of the news because it underlines a fundamental thesis that has ruled the market in recent months — Canadian cannabis stocks are in trouble.

With questions surrounding long-term viability and limited chances of recovery, Tilray is heading towards a dead end. The stock will keep bleeding value as we move further along in the year, and it’s best to get off the train while you still can.

It Only Gets Worse From Here for TLRY Stock

Tilray dropped first-quarter figures on May 11, and the report was generally disappointing. Revenues increased by “126% to $52.1 million, from $7.9 million a year ago,” but that was the only bright spot in the earnings release. And even though revenues are moving in the right direction, there are specific underlying trends that need your attention.

Of the aggregate increase, just 9% was down to marijuana sales. That’s very troubling, considering that the company primarily cultivates and sells medical cannabis. Hence, the bulk of selling isn’t attributable to cannabis; rather, it has more to do with Manitoba Harvest, Tilray’s wholly owned subsidiary, recording higher sales from its hemp foods business.

Many analysts were left scratching their heads when the company paid $419 million to acquire Manitoba in early 2019. However, the decision is slowly paying dividends because it diversifies Tilray’s overall offering.

Liquidity Is Evaporating

Liquidity is fast becoming a hot button issue for Tilray. Operating cash outflows fell to $54 million in the first quarter, a 68.52% fall from $91 million in Q4 2019. That is mostly down to the increase in sales. Management expects operational outflows of $35 to $45 million for the rest of the year.

Tilray did not proceed with any significant acquisitions during the quarter. Capex came in at $18 million, more or less the same as the previous quarter. Overall, free cash flows finished at $72.32 million in the red. The figure was a marked improvement, on a sequential basis, from the negative $118.06 million the company reported in the previous quarter.

Unfortunately, that is not due to operational performance. Instead, cash inflows for the quarter have come in the shape of share issues and a $60 million senior secured credit facility. Let’s focus in on the share issue because it has become a significant talking point for TLRY stock during the quarter. The company raised $90 million through issuing 19 million shares at $4.76 per share along with warrants “exercisable” at $5.95 per share. This news was not received well by the markets and understandably so, considering the offering price.

However, the deeper issue is that this will not be the last time Tilray will need to tap the equity markets for its capital needs. Considering the high rate of cash burn, the company will likely need refinance within the next six months. The problem here is that if the company taps the equity markets again, it will lead to sharp dips in the share price.

Growth Is a Major Problem for Canada’s Cannabis Market

There isn’t any sector on earth that hasn’t been impacted by the novel coronavirus in some way, and the marijuana industry is no different. Initially, companies noted an uptick in sales due to the nature of the crisis, as people spent more time indoors and stress levels increased.

However, Canadian Imperial Bank of Commerce’s (NYSE:CM) investment banking arm, recently slashed its forecasts on the local pot market. According to CIBC Capital Markets, recreational cannabis sales will reach CAD $2.5 billion, instead of CAD $3.4 billion as previously envisioned. In 2021, projections were for the industry to touch CAD $5.5 billion. However, that figure has been slashed by 25% to $4.1 billion. There are multiple reasons for the pessimistic outlook, including fewer store openings and stalled store license applications.

As I have noted earlier, the Canadian pot market suffered from overenthusiastic valuations when the country legalized weed back in 2018. However, Covid-19 will further slow down growth in the sector, at least for the foreseeable future. Tilray’s overt reliance on Canada is an Achilles heel, as data indicates other territories have more to offer. For example, California alone is projected to reach a market size of $7.2 billion by 2024.

Bottom Line on Tilray

I do not believe Tilray is an attractive play at this point because several moving pieces do not work in its favor. First-quarter results were impressive, but I think they’re a blip on the radar, and regular service will resume soon.

After eight straight quarters of negative cash flow and EBITDA, profitability remains a distant dream for Tilray. On top of that, the company needs to raise capital frequently to cover operational costs. Barring any significant changes in fundamentals or the outlook for Canada’s cannabis space, expect the stock to continue limping along.

Sell TLRY stock.

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