There’s no need to mince words: Tilray (NASDAQ:TLRY) stock isn’t responding all that well to last quarter’s results. Tilray stock fell to the tune of 10% on Wednesday despite reporting third-quarter earnings estimates that were better-than-expected after Tuesday’s closing bell rang.
Granted, revenue came up short of expectations, and despite the improved bottom line, the (legalized) marijuana provider still booked a loss. It’s not like the company is a viable business yet. It needs more time, but it’s not exactly clear how much more time it needs.
Whatever the case, current and prospective shareholders may want to at least acknowledge the possibility that they’ve been lured in more by the premise and less on the likelihood of an eventual, respectable profit. Now that crowd is rightfully rethinking … everything.
Stories and Promises Don’t Pay the Bills
If the idea seems vaguely familiar, there may be a reason. Yours truly here cautioned back on Oct. 26 that Tilray peer and rival Aurora Cannabis (NYSE:ACB) was also a concept-based trade, rooted mostly in the premise and not based on any reasonable profit projection. Ditto for Canopy Growth (NYSE:CGC), and a whole slew of other pot stocks. Tilray stock, like all the rest, has been flying high on hype.
It’s not as if we’ve not seen the problems with pure premise-investing before. Fitbit (NYSE:FIT) was a heroic performer when it first went public in 2015 right as the “wearables” movement gelled. Since peaking near $45 in the middle of that year, FIT stock peeled back to a price of under $6. As it turns out, consumers aren’t nearly as stoked about fitness trackers as investors were led to believe.
GoPro (NASDAQ:GPRO) is another example of an outfit that didn’t live up to the hype. Undoubtedly it makes the best action camera in the world. As it turns out, the world just doesn’t need that many action cameras.
In defense of Tilray stock, the outlooks for the legal marijuana market not only appear more compelling, they’re also legitimately compelling.
As of the most recent estimates, sales of legal cannabis — medical and recreational — were on the order of $6 billion last year. Factoring in the illegal market, the United States does something closer to $60 billion worth of marijuana business per year. The movement to legalize those sales continues to gain traction, and not just in the United States. All told, considering current trajectories, Grand View Research, thinks the global market for legal marijuana will reach $146 billion by 2025.
Tilray stock is well-positioned to capture its fair share of that market, and then some. Its recent approval to supply Germany is a microcosm of the kind of attention the company’s already getting all over the world.
One can’t help but wonder, however, if Tilray will still end up following in the paths GoPro, Fitbit and so many others. The hype machine is powerfully deceptive, and there are untold numbers of outfits aiming for the same piece of the cannabis market.
Earnings Report Provides Reality Check
Its work is certainly cut out for the company if last quarter’s results are any indication of what lies ahead.
For its third quarter ending in September, Tilray sold $10 million worth of weed … all of it for medicinal purposes, and increasingly more of it on a wholesale basis. That was an 86% improvement on Q3 2017’s top line, and still doesn’t reflect the potential of recreational marijuana, which only became legal to sell in Canada as of Oct. 17. That’s encouraging.
The bad news: Owners of Tilray stock are quickly learning how expensive it can be to run a for-profit company, and learning how competitive the marijuana market may end up becoming. Its sales and marketing expenses more than doubled on year-over-year basis, and its average selling price fell from $7.53 to $6.21 per gram. The company’s reported sales also fell short of the $10.1 million analysts had been modeling. Just like other agricultural products or natural resources, marijuana looks like it’s becoming a commodity too, with all the trappings thereof.
End result? The company’s operating loss $7.5 million, or eight cents per share of TLRY stock, widened from year-ago losses of $1.8 million or two cents per share. The pros were calling for a loss of twelve cents per share. It’s not exactly the scale-up investors were hoping to see.
Bottom Line for Tilray Stock
Will there ever be enough profit to justify Tilray’s current market cap of $9.4 billion?
That’s the big bet owners of Tilray stock are making, to be clear … that the Canadian company will capture more than its fair share of the growing cannabis market, scale up revenue and gross margins without scaling up expenses, and successfully (and cost-effectively) navigate all the legal nuances of selling what will be a highly-regulated drug. Never even mind that fact that marijuana is a business that favors small-scale growers who can tend to the process — one of Tilray’s chief complaints about last quarter was the poor quality of the supply available to it.
And, with a market cap of more than $9 billion, Tilray will have to improve its quarterly top line of $10 million to something on the order of $750 million (assuming a generous price/sales ratio of 3.0) to have any reasonable shot at turning enough of a profit to make it a more productive investment than thousands of other investment options. Moreover, that assumes its achieving typical net profit margins of around 10%.
Put it all together and what you’ve got is an enormously risky bet, given all the curve balls that could be thrown at it and the sheer depth and breadth of the competition … seen and unseen.
Just make sure you understand Tilray stock is nothing more than a hype-driven trade here. There’s no actual “investment” aspect to it. The realistic end zone isn’t even in sight.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.