Last week’s earnings report for cannabis company Tilray (NASDAQ:TLRY) got a nice reception from Wall Street. On the news, the shares rose about 5%. But the gains would not last. The Tilray stock price has since dropped off, hitting near a 52-week low.
This is certainly a big let down from the company’s explosive IPO, which happened in July 2018. Keep in mind that TLRY stock soared from $17 to $300!
But in the wild-west of the cannabis industry, success can be fleeting. As of now, TLRY stock is at $44. This is a grueling 85% off from its all-time high.
Despite this, the valuation is still far from cheap, as the price-to-sales ratio is 75x and the market cap at $4.2 billion. But valuation is not the only issue. For the most part, there are various other fundamental problems with TLRY stock.
So let’s take a look at three that stand out:
Tilray Stock Problem #1: Production
It’s true that Tilray is growing at a blistering pace. In the quarter, sales spiked by nearly 200% to $23 million. The legalization in Canada — for recreational use of marijuana — has definitely been a game changer.
But when you look deeper into the numbers from the quarterly report, there are some nagging red flags. First of all, the losses have escalated, coming to 32 cents a share in the quarter. This was up from 7 cents a share in the same period a year ago.
True, when a company is in the hypergrowth phase, there is a need to ramp up expenditures. Yet there is something more to the story. Consider that the company relies heavily on third-parties for production, which adversely impacts gross margins. In the quarter, Tilray sold 3,012 kilograms while Canopy Growth (NYSE:CGC) sold 10,102 kilograms. What’s more, about $5.6 million in sales came from the recent acquisition of Manitoba Harvest, which sells hemp food products. So if supply constraints persist, this will inevitably weigh on growth.
Something else: The medical business for Tilray has shown little traction, despite the investments. International sales also remain minimal at $1.8 million.
Tilray Stock Problem #2: Market Dynamics
What often gets lost in cannabis investing is that the industry is commodity based. In other words, there can easily be surpluses, which drive down prices. This is why scale and diversification are critical for success.
But with Tilray, there are troubling signs with the overall market. During the past year, the average selling price per gram has gone from $5.94 to $5.60. Granted, this may turn out to be temporary. Then again, with the strong interest in the cannabis industry, it does seem reasonable that supply could get overextended.
According to the 10-K for the company: “Despite the legalization of medical and adult-use cannabis in Canada, black market operations remain abundant and are a substantial competitor to our business.”
Tilray Stock Problem #3: Strategic Partnerships
But these deals are not transformative. After all, CGC and Cronos Group (NASDAQ:CRON) have snagged billions from operators like Constellation Brands (NYSE:STZ) and Altria Group (NYSE:MO). Actually, the deals are about more than the money. They will allow for leveraging brands and global distribution.
In the Tilray earnings call, CEO Brendan Kennedy did remark:
“We’ve been inundated with contacts from Fortune 500 companies who are interested in exploring partnerships with Tilray. And it’s a range of companies from a broad variety of industries. And generally the deals that have been done with other companies, we generally talk to those people at some point in their process right.”
This is fine. But why is he waiting to pull the trigger on a mega deal? Given how fast the industry is moving, Kennedy’s lack of action to do so seems limiting — and could ultimately make it tougher to catch up.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.