Cannabis stocks have found a bottom, and Tilray (NASDAQ:TLRY) is no exception. TLRY stock has more than tripled off its March lows.

Of course, those lows came amid a market stampede out of cannabis stocks. And despite the sharp rally over the past two months, TLRY stock remains down 53% year-to-date.

Still, there are signs of life in the stock — and the sector. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), which I track as a barometer for the industry, has bounced 44% off its lows. Like Tilray, it too is down sharply over the past 12 months.

I personally remain bullish on the potential of cannabis. There will be some short-term hits from the novel coronavirus, certainly. The long-term outlook, however, remains bright.

But I don’t see TLRY stock as the right way to play that growth. Last week’s earnings are one reason why.

Earnings Look OK…

On its face, Tilray’s first-quarter report last week looks reasonably strong. Revenue more than doubled year-over-year, and climbed 11% quarter-over-quarter.

Top-line performance nicely beat analyst expectations. And the sequential growth came despite weakness in bulk sales, which is attributable in part to the pandemic.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) remained negative, as Tilray posted a $19.7 million loss in the quarter. But there’s good news there, too. Tilray said it was aiming to deliver positive adjusted EBITDA by the end of the year, in part due to cost reductions.

What’s interesting about the broad strokes of the release is that it sounds awfully similar to that of Aurora Cannabis (NYSE:ACB), who reported earnings three days later.

Aurora, too, topped revenue estimates handily. That company also forecast positive adjusted EBITDA in a couple of quarters. Like Tilray, Aurora is using cost cuts to get there.

Yet ACB stock nearly tripled in three sessions into and out of earnings. Even with a pullback the last days, it’s more than doubled in a week.

TLRY stock, meanwhile, fell 7.6% on its release. The stock trades 3 cents below where it closed ahead of the earnings release.

…But There Are Concerns

That relative underperformance in TLRY seems surprising. Both companies seemed to show some resilience in cannabis demand. Both companies are moving toward profitability, if only on an EBITDA basis. But Aurora stock was rewarded (though it’s faded since). Tilray stock was not.

As far as Tilray goes, however, the quarter still shows significant reason for concern from a fundamental perspective. At the beginning of this month, I highlighted some of the negative long-term trends in Tilray’s numbers. Those trends aren’t yet improving.

For instance, gross margins have steadily eroded, from 55.4% in 2017 to 33% in 2018 to just 21% in the first quarter of 2020. Inventory valuation adjustments were a factor in the most recent quarter, but even backing those out gross margins were below 30%.

Operating cash flow too headed in the wrong direction. The deficit was a little over $3 million in 2016 — and $258 million last year. Tilray expects significant improvement, but per the Q1 conference call still expects to burn $35 million to $45 million this year. Free cash flow burn should exceed $100 million.

Tilray isn’t out of the woods yet. The company isn’t profitable, and still is burning cash. The balance sheet is getting tighter. There’s simply not much room for error from a fundamental perspective. And there’s a strategic concern as well.

The Strategic Concern with TLRY Stock

What worries me with TLRY stock is how the company plans to get to profitability. There’s some revenue growth — but cost cuts are a big part of the plan.

Here, too, there are echoes of Aurora. I have the same worry about that company’s aggressive cost reductions.

After all, any investor who owns TLRY stock or ACB stock has to believe in the long-term opportunity in cannabis. But those companies can’t capitalize the way they’d like to.

Tilray, in particular, isn’t cutting costs because it wants to. It’s doing so because it has to. The balance sheet can’t handle more cash burn and aggressive investments.

But companies should be aggressive during this time of disruption. And those companies that do so will be rewarded by the market. Look outside of cannabis. We’re seeing the likes of Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) — all leaders in their industry — rally sharply.

That’s in part because of market growth — but also because those companies are investing behind their businesses. While weaker rivals struggle, those leaders can cement their dominance.

The problem for Tilray is that its own strategy shows it is one of those weaker rivals in a market that should be growing. Meanwhile, Cronos (NASDAQ:CRON) and Canopy Growth (NYSE:CGC) have billions of dollars in cash that they can use to take share and drive innovation.

That cash will allow those companies to take advantage of growing cannabis demand. Tilray doesn’t have that ability right now.

That’s a big reason why both CGC and CRON are part of our Cannabis Cash Weekly portfolio. And it’s a big reason why TLRY isn’t.

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