Tilray (NASDAQ:TLRY) is set to report its latest quarterly earnings on Nov. 12. And at this point, if you own TLRY stock, you have to be at least a little nervous. Earnings seasons have been painful for marijuana companies throughout 2019 and this one is off to a similarly poor start.
That doesn’t mean Tilray is necessarily destined to disappoint. But so far, marijuana companies have given little evidence that things are improving. There’s still way too much inventory compared to the demand for legal cannabis in Canada. And markets outside of Canada simply haven’t been coming online fast enough to sop up all the excess supply.
As if that weren’t enough, companies like Aurora Cannabis (NYSE:ACB) continue to build massive amounts of new infrastructure for growing more marijuana. But it’s unclear when demand will catch up with existing supply.
Against this backdrop, is there any hope for TLRY stock with this upcoming earnings report?
Tilray: Slower Pace May Pay Off
A big knock on TLRY stock is that the company hasn’t invested heavily in the Canadian market. As a result, it has generated rather modest revenues from Canada since legalization, and is outside of the top five in terms of marijuana companies in that market.
Additionally, by relying on third-party suppliers instead of cultivating its own marijuana, Tilray has ended up with far lower gross profit margins than many of its peers. Tilray appears to consider this a strategic error; it’s now investing, particularly through the Manitoba Harvest deal, in more production capacity for Canada. The delay could potentially come with a silver lining, however.
Other firms like Hexo (NYSE:HEXO) and CannTrust (NYSE:CTST) are starting to cut back on operations. Tilray, whether by design or accident, could be a beneficiary by bolstering its capacity in Canada as others are already starting to pull back. Generally you get better prices, deals, access to land and labor and so on once an industry goes into a downswing. That said, there still appears to be way too much capacity now, so Tilray may still not be able to achieve adequate profit margins with its new investments.
U.S. Pharma Deal and Other International Operations
Last month, Tilray announced that it had successfully imported marijuana to the U.S. for use in a clinical trial. Tilray’s cannabis will be used in a clinical trial led by Professor Dianna Martinez, M.D., and Professor Margaret Haney, Ph.D., at the Columbia University Irving Medical Center researching taxane-induced peripheral neuropathy (TIPN). TIPN affects roughly two in three women suffering from breast cancer and can make it harder to complete chemotherapy treatments for the cancer. The trial seeks to see if THC and CBD will be able to reduce the severity of TIPN in cancer patients.
This sort of trial shows that Tilray is taking creative approaches to try to deal with the oversupply of cannabis in the Canadian market. That U.S. supply arrangement isn’t the only thing Tilray has been working on. It is also continuing to build out its Portugal beachhead in the European market.
However, investors should take a wait-and-see approach to Tilray’s European operations. At this point, Aurora and other cannabis companies have created much more impressive global-scale operations. TLRY stock could eventually rally sharply if the company can make in-roads in Europe. But at this point, that’s more speculation than sure thing.
Cash Burn: The Elephant in the Room
It’s not all good news for TLRY stock. As you could probably guess from the plunging price of Tilray stock, the company has a serious issue: cash. Namely, Tilray burned through roughly $100 million last quarter. It only had $215 million as of June, so the company doesn’t have a full treasury by any means.
Tilray probably spent through a large chunk of that remaining $215 million over the past few months as well. It had big expenses, such as cash owed in relation to the Manitoba Harvest acquisition in addition to its regular expenses as it builds out more operations.
To fight off this impending cash shortage, in September, Tilray announced an up to $400 million stock offering. It will be selling shares at the market, meaning that it can issue new stock and immediately sell it to the public during the course of normal trading. This raises much-needed cash for Tilray but serves to dilute existing shareholders in a dramatic way. Investors should watch Tilray’s cash levels closely in this upcoming quarterly report.
My TLRY Stock Verdict
When will enough be enough for TLRY stock? Incredibly, Tilray completed its IPO at $17 per share. The TLRY stock price would go on to peak at $300. At that time, it was virtually inconceivable to think that Tilray would ever revisit its initial IPO price. Yet, here we are at $23 per share now. Anyone that bought the IPO and diligently held on is now nearing a loss.
After dropping this far, TLRY stock might finally bounce. Tilray is one of the worst-performing major marijuana stocks year-to-date, as it is down 69% over the stretch. Clearly struggling rivals like Hexo and Canopy Growth (NYSE:CGC) are down 67% and 21% year-to-date, respectively, by comparison. Thus, with Tilray taking the biggest hit, it may have some of the biggest bounce-back potential.
To get any sort of positive trading momentum, however, Tilray will need to impress the market with its quarterly earnings report. Maybe it figures out some other unique deal such as the U.S. pharma supply arrangement to help juice its prospects. If it can’t, though, there’s little reason to expect Tilray stock to do much during the remainder of 2019. And its looming cash crunch could scare off traders heading into next year.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.