Tilray (NASDAQ:TLRY) stock seems to be in disarray after having declined by more than 90% from its all-time-highs. But the company’s September 2019 presentation seems to indicate that the opportunities of the cannabis industry are endless.
That may be true, but the presentation does not touch on a single challenge facing the industry, even though marijuana stocks have plummeted over the last six to eight months. So it might make sense to talk about the sector’s potential challenges, since TLRY has already talked about all of its opportunities.
TLRY stock might not drop too much below its current levels. But I don’t expect the market’s mood towards marijuana stocks to change much anytime soon. So I recommend that investors avoid buying TLRY stock.
As Tilray’s Revenue Grows, Its Cash Burn Rises
TLRY reported that its revenue jumped nearly 200% year-on-year in the first quarter. Its revenue growth accelerated to 371% in Q2. Tilray stock however continued to trend lower as its top-line numbers failed to impress the markets. The reasons for that are as follows:
- The company’s gross margin has declined from a high of 55% in 2016 to 26% in the first half of 2019. That’s because its selling price per gram of cannabis has dropped even as its average cost per gram sold has increased. The company expects its long-term gross margin to be 50%, but that goal likely won’t be reached anytime soon.
- In the first half of 2018, TLRY had negative operating cash flow of $2.9 million. In the first half of 2019, that worsened significantly to -$110.2 million. Margin compression is widening the company’s operating losses. As a result, its cash burn will accelerate, and it would not be surprising if TLRY has to sell more shares of TLRY stock in 2020.
Too Early to Expect Medicinal Cannabis Growth
According to the company’s September 2019 presentation, 41 countries have legalized medicinal cannabis. Further, TLRY already sells marijuana in 13 countries.
I believe that it’s too early to assume that medicinal cannabis growth will be robust. An article from National Institute of Drug Abuse states, “So far, researchers haven’t conducted enough large-scale clinical trials that show that the benefits of the marijuana plant (as opposed to its cannabinoid ingredients) outweigh its risks in patients it’s meant to treat.”
Further, according to Peter Grinspoon, who teaches medicine at Harvard Medical School, “A significant safety concern with CBD is that it is primarily marketed and sold as a supplement, not a medication. Currently, the FDA does not regulate the safety and purity of dietary supplements.”
A similar point was made by Pieter Cohen, an associate professor at Harvard Medical School. “As long as the companies selling supplements avoid specific disease claims, such as “this will treat diabetes,” they can pretty much market CBD for a wide variety of indications, even though there’s no proof that it actually works in humans.”
By sharing the views of these medical experts, I’m trying to make the following points:
- Clinical trials haven’t proven that cannabis effectively treats a wide array of diseases. Clinical trials will take time, so the growth of the medicinal cannabis sector will be slow.
- The government may more strictly regulate cannabis supplements and prevent cannabis makers from releasing certain types of products.
These factors will limit the growth of cannabis drugs and supplements.
Further, TLRY will have to invest in R&D, marketing and a robust distribution network. Therefore, I would not be surprised if it continues to burn cash for the next few years. As a result, it will probably have to sell more shares of Tilray stock and increase its debt load. These issues are currently being reflected by TLRY stock.
Final Views on Tilray Stock
TLRY has a diversified range of products that include protein powder, hemp oil, bars, and CBD. The company also plans to introduce vapes, edibles and beverages in the future. However, its key challenges are convincing consumers to buy its products and withstanding potential regulatory headwinds.
I expect cannabis drugs and supplements to gain traction once more clinical trials are completed and more drugs are approved by the FDA.
However, in the foreseeable future, Tilray stock is likely to trade sideways or lower because worries about its cash burn and regulatory headwinds will dominate investors’ outlook.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
