It seems like Tilray (NASDAQ:TLRY) has returned to normal. Heading into second-quarter earnings on Tuesday, Tilray news had been relatively quiet. Tilray stock had traded sideways.
Put another way, there hasn’t been much in the way of fireworks. But that’s not necessarily a bad thing. The first cannabis IPO on the NASDAQ (NASDAQ:NDAQ) exchange, TLRY very quickly turned into what looked like a bubble.
The IPO priced at $17, and early trading was solid, if not spectacular. But after its first month of trading, TLRY suddenly took off: at one point, the stock touched $300.
Since then, it’s been a long, painful slide — until the last few months. Tilray stock actually has held up reasonably well in a market that has been unkind to most pot plays, with leaders like Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON) well off their highs.
Some disappointing Tilray news has changed that somewhat, as TLRY slid more than 10% in after-hours trading following earnings on Tuesday afternoon. But the report, from here, looks reasonably positive.
More importantly, this is not a stock that necessarily should be judged on single quarters — at least not yet. Tilray isn’t looking to maximize near-term revenue or profits. It’s taking the long view. And while there’s a reasonable debate over whether that view is correct, Q2 earnings don’t seem to change the case all that much.
Tilray News Looks OK
Tilray seems to have been hit by a somewhat odd fact of cannabis investing at the moment: investors suddenly seem to be focusing on profitability over revenue. The fact that Aphria (NYSE:APHA) posted a blowout quarter last month, and guided for positive Adjusted EBITDA, may be a factor. So too may be waning patience with recreational legalization stalling out in Canada in and beyond.
Whatever the cause, that focus doesn’t seem to make a lot of sense. Tilray CEO Brendan Kennedy explained why on Tuesday’s Q2 conference call:
If your company is a small to midsize LP [licensed producer] in Canada, or an MSO [multi-state operator] in the United States that can export to other countries then I think those countries — those companies should be focused on profitability.
But you only see an opportunity like this once in your lifetime. And if you’re trying to dominate a global industry, you’d be constraining yourself if you were focusing entirely on profitability at this point. Globally, it’s very early in the emergence of a $200 billion industry. And globally, if now is not the time to invest, I don’t know when is.
Tilray’s revenue of US$45.9 million was nicely ahead of consensus expectations for US$41.1 million. But Tilray news on the profit front was softer: an Adjusted EBITDA loss of US$17.9 million against an average estimate of -US$14.4 million. That profit miss seems to be one of the catalysts sending TLRY stock lower after-hours.
The Sell-Off in Tilray Stock
To be fair, there’s another catalyst. TLRY shares gained over 8% in regular trading. Cannabis stocks on the whole did well: CGC gained 4%, and CRON 5%. But it’s likely some traders were betting on a big earnings report as well, and felt Tilray didn’t quite deliver.
That said, Tilray did post a big revenue beat relative to expectations. Adult-use revenue almost doubled from Q1 levels. The acquisition of Manitoba Harvest for US$317 million in February added another $20 million in sales.
As Kennedy argues, that’s what should matter at this point in the development of the cannabis industry. There’s not a lot of sense in cutting costs now ahead of what bulls expect will be a massive global opportunity. If an investor wants profits — or doesn’t think that opportunity is as big as optimists believe — there are thousands of other stocks to buy.
The Long-Term Case for TLRY
There’s another aspect to the sell-off worth noting. Tilray isn’t looking to maximize near-term revenue. Unlike many larger cannabis plays, it’s not even looking to build out actual production. Rather, it’s happy to simply buy cannabis from third-party producers.
As I wrote in May, the reason for that strategy is that Tilray management believes cannabis prices are going to come down over the long term. Cannabis will be a commodity product, which means spending capital to build production is unlikely to be an investment that drives big returns.
Instead, Tilray is focusing on hemp-based food products through the Manitoba Harvest, and derivatives such as cannabis oil. It has entered the U.S. CBD market. A partnership with Anheuser-Busch InBev (NYSE:BUD) will research drinks including either CBD or THC.
It’s a strategy that may not work. Vertically integrated producers like Canopy, Cronos, or Aurora Cannabis (NYSE:ACB) may be able to leverage their production to out-compete Tilray in cannabis derivatives.
At the least, it’s a strategy based on the thesis that those companies spending hundreds of millions of dollars to build production — and drive near-term revenue — are making a mistake. A single quarter’s earnings don’t really change the case all that much. In addition, TLRY’s higher multiples based on revenue do make some sense; it’s focusing on driving better, and more profitable, revenue over time.
Again, that doesn’t make TLRY a buy. In fact, I wouldn’t recommend it yet even at after-hours levels. As I have written before, Tilray is being patient, and investors can do the same.
But it does mean that 2019 earnings simply don’t change the case all that much. That’s important to keep in mind particularly if the sell-off in Tilray stock accelerates.
As of this writing, Vince Martin has no positions in any securities mentioned.