The past few months haven’t been kind to Tilray (NASDAQ:TLRY). Tilray stock is down from above the $45 price level in July to around $20 today.
The company reported mixed results at its last earnings release on Nov. 12. While earnings are up year-over-year, sales growth has been slow as of late.
But what does that mean for Tilray? The upcoming launch of “Cannabis 2.0” may help the company. But Tilray’s dwindling cash and high debt could leave the company in a capital crunch. Add in a major shareholder who could start unloading shares within the next two years, and there’s plenty of reasons why shares could trade lower.
Let’s take a closer look, and see why TLRY stock is not a buy today.
Recent Developments in Tilray Stock
Tilray’s latest earnings release was a mixed bag in terms of the company’s future prospects. Revenue for the quarter ending Sept. 30 was up 409% year-over-year, but this is a misleading metric. Given that recreational pot has only been legal in Canada since last October, any pot company in business prior to Fall 2018 saw a massive sales bump from the prior year.
Compare TLRY sales to last quarter and things look less impressive. Tilray’s revenues for the September quarter (excluding excise taxes) were $48.2 million, compared to $42 million in the quarter ending June 30. The company continues to lose money, with EBITDA losses of $28.9 million for the quarter (compared with $25.9 million last quarter).
Tilray’s poor performance has been blunted thanks to last February’s Manitoba Harvest acquisition. As InvestorPlace’s Will Ashworth wrote Nov. 18, without this deal, Tilray’s operating losses would have increased by 37.5% YoY as opposed to just 16.5%.
Manitoba Foods sells CBD-infused foods. High-margin marijuana products are the future for the pot industry. With looming inventory and poor distribution, it’s tough to make money selling straight-up weed. But with these emerging branded products, TLRY stock has a clear path to upside.
An upcoming catalyst for Tilray stock is “Cannabis 2.0”. This is when products like cannabis-infused beverages, edibles, and vapes hit Canadian shelves. These higher-margin products could help use up pot supply, and help the floundering industry pivot towards profits.
Tilray has thrown its hat in the ring with Fluent Beverage Company. This joint venture with Anheuser-Busch Inbev (NYSE:BUD) plans to start with CBD-infused drinks, with THC-infused drinks in development. But are infused beverages the answer to the company’s issues. TLRY remains overvalued, even as the company faces liquidity risks.
Valuation and Dilution a Concern With TLRY
Tilray stock remains overvalued. On an enterprise value/sales basis, Tilray trades at a premium to Aurora Cannabis and Canopy Growth. Tilray also trades at a higher multiple than other major peers like Hexo (NYSE:HEXO).
One major pot stock, Cronos Group (NASDAQ:CRON), trades at a higher valuation. But unlike Cronos, Tilray does not a deep-pocketed strategic partner. Cronos may be overvalued, but financial backing from Altria (NYSE:MO) may help it weather continued losses.
On the other hand, Tilray has cash troubles. The company’s cash and cash equivalents have fallen from $487.2m at the start to 2019 to $100.2m as of September 30. If losses continue (or accelerate), the company’s cash needs could become a greater risk.
But Stifel’s Andrew Carter is not so worried. He believes TLRY has enough cash to “satisfy its investment needs through (the second half of 2020)“.
How about after 2020?
Tilray has $475 million worth of outstanding convertible notes, due in April 2023. But these notes were issued back when Tilray stock was trading above $100/share. The conversion price is $167.41/share. Assuming TLRY stock doesn’t rally back to 2018 levels, the company will need to refinance once the notes mature. This may mean a dilutive raising of equity.
Back in October, I discussed another downside risk factor: Tilray’s majority shareholders may be looking to sell their position. They are subject to a lockup, but this lockup starts to end within a year. Two years out, and the investors are free to dump their Tilray shares.
Bottom Line: Tread Carefully with Tilray Stock
Tilray stock is a minefield of risk. “Cannabis 2.0” could improve their fortunes. But a myriad of risks remain. With $450 million in convertible notes coming due in 2023, TLRY needs to improve its cash situation.
Unless the company is swimming in green (cash, not pot) by then, Tilray will need a capital infusion to stay afloat. Add in potential selling pressure from Privateer shareholders unloading their position, and there are too many fleas on this dog for my taste.
Other pot stocks may offer a clearer path to success. Consider them before taking a look at TLRY stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.