Cannabis stocks are known for volatility in both directions. These names can skyrocket during good times, but during troubled times, they are difficult to own. That goes for Tilray (NASDAQ:TLRY) too, as TLRY stock has now fallen 63% from its 2020 high.

Unfortunately, it gets worse. The company’s stock has fallen  approximately 85% from its one-year highs. From the all-time high in 2018, shares are down more than 96%. Listen friends, cannabis stocks are in a tough position right now, but 96% off the highs is not a sign of a winner.

For some investors, they may view that kind of decline as a buying opportunity. In some instances, that’s true. And to be fair, there’s nothing that says Tilray is forbidden from a rally. For me though, I’m taking a pass on TLRY stock. It simply does not have the fundamentals or technicals that make it attractive.

Sizing Up TLRY Stock

The trend has been down for TLRY stock, that much is no surprise. Even good stocks can have poor technicals. But in this case, the fundamentals are also a bit dire.

We heard from Tilray a few months ago when it reported earnings in early March. A non-GAAP loss of 62 cents per share missed estimates by 24 cents, while a GAAP loss of $2.14 per share badly missed expectations. Revenue of $46.9 million tripled year-over-year, but missed estimates by $8.6 million.

There’s a big difference between a company like Apple (NASDAQ:AAPL) missing revenue estimates by $8.6 million and Tilray. The miss landed the company’s sales figure short of estimates by over 13%.

The company recorded a net loss of more than $200 million in the quarter. Because of its continued burn, Tilray has had to raise cash, diluting investors with more stock sales.

Biggest Issue With Tilray

Here’s my biggest problem with Tilray: profitability.

It’s not just that Tilray doesn’t turn a profit, it’s that it’s getting worse at it. In 2017, Tilray generated $11.4 million in gross profit off of $20.5 million in sales. That’s good for gross margins of roughly 55.4%.

In 2018, that number dropped significantly to just 33%. In 2019, it went negative. That dive was mostly due to the fourth quarter, but the first three quarters weren’t all that impressive either. Tilray generated gross margins of 23.37%, 26.73%, 31% in Q1, Q2 and Q3, respectively.

Current assets of $259 million are bolstered by $87 million in inventory. However, even if that were excluded, current assets of $172 million is enough to cover the $92.4 million in current liabilities. Without profitability or positive cash flow though, the balance sheet will continue to dwindle.

That brings up my other main issue with TLRY stock here: cash flow.

It’s okay for a company to be in growth mode and have negative free cash flow at the same time. But when free cash flow worsens as revenue grows, it gets investors’ attention. Operating cash flow has been negative for the last four years and worsens with each year that goes by. Starting from 2016, the deficit goes as follows: $3.3 million, $6 million, $46.2 million and finally, $258 million in 2019.

Free cash flow takes a similar path, with its deficit in 2016 through 2019 as follows: $4.3 million, $17.4 million, $100.7 million and $336.7 million.

Put simply, this is not a business I want to sink my hard-earned money in.

Trading Tilray Stock

Does that mean I don’t like cannabis stocks? On the contrary.

Some names are trading poorly but making positive improvements on the charts and in their business models. That includes companies like Canopy Growth (NYSE:CGC) and Aphria (NYSE:APHA), among others.

To be fair, TLRY stock has done a great job at rallying lately. As I said earlier, shares are not immune to a rally and the chart highlights just that. Tilray has tripled off its low at $2.43.

From here, investors will need to see if Tilray can rally through $10, which has been resistance over the past two months. On the downside, a move below its 20-day and 50-day moving averages likely sends shares back down to range support near $6. Below $5 and another test of the lows may be possible.

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