Tilray (NASDAQ:TLRY) has dropped more than 55% in the past two months since August 13 and over 61% in the past six months since April 26. In short, the jig is up. The market is not going to put up with Tilray stock as it remains unprofitable.
The fact that TLRY stock has fallen so far doesn’t mean it can’t still drop significantly. As the Wall Street Journal put it in an Oct. 12 article titled “Marijuana Madness Turns Into Cannabis Crash,” – “the party is over for cannabis companies.”
The market is fed up with a string of disappointing quarterly results and the “overly rosy” growth forecasts in the industry.
Tilray still has a $2 billion market value even though its quarterly sales are only $34 million. But its losses are growing. Even though sales doubled in Q2, its losses still grew 16.7% to over $26 million for the June quarter.
More importantly, Tilray booked a first-half operating cash flow loss of $82.5 million. After including investing activities, that loss widened to $231 million. Tilray can’t afford that kind of disastrous cash outflow. It only had $165.5 million in cash and securities left on its balance sheet as of June.
Cowen and Tilray Stock
On September 10, Tilray hired Cowen and Company to raise $400 million in Rule 144A privately sold equity shares. Wall Street smelt blood with this capital raise. The stock fell for at least three reasons:
- the dilution effect, i.e. $400 million / $3 billion market value (at the time) or 13.3%
- Tilray appeared to be running short of cash, and also
- because of expectations of further equity sales would be needed.
In other words, the equity capital raise had a cascading, accelerating effect on the drop in Tilray stock. On Wall Street, they call this a “death spiral.”
There is a whole cadre of hedge funds that lurk like sharks waiting to short these kinds of stocks. They short the stocks of money-losing companies that as soon as financers announce equity capital raises for these kinds of companies. It is irrelevant to them whether or not the company completes the financing. They push the stock down attempting to kick it into a death spiral since it is so vulnerable.
The Bottom Line on Tilray Stock
The situation is now a “show-me” one for Tilray. Guidance about profits won’t be good enough. One analyst pointed out that the biggest problem with Tilray is that the average net selling price for its cannabis fell 28% YoY. The problem is that Canada is now facing a huge oversupply of cannabis. This has reduced the sale price of the wholesale product.
Until that issue gets resolved, the stock will be in the doldrums. Investors need to be aware that the company could easily go bankrupt if it continues its losses and cannot raise financing.
Stay away from Tilray stock until it actually books a profitable quarter. You might miss an uptick at the point, but at least there would be evidence of profitability. That will be worth more than gambling on a company that appears to be in a death spiral right now.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks, which includes both dividend and buyback yields. In addition, subscribers a two-week free trial.
