On Nov. 11, Tilray (NASDAQ:TLRY) reported the beginnings of a turnaround in its cannabis business. As a result, Tilray stock has been rising and it could end up making a serious comeback from its prior lows.
In the past month, the stock moved rose more than 43% to $8.60, as of Dec. 4. However, it is still well down from its prior peaks. It is down almost 50% year-to-date and also 54% in the past year.
That allows for a significant upside still in the stock if it continues this turnaround.
Higher Sales and Forecast of EBITDA Profits
One thing that will push it higher is growing sales momentum, on top of the growth that was shown in its Q3 report. For example, Tilray reported flat year-over-year cannabis sales, but a sequential growth of 2% quarter-over-quarter.
More importantly, the company said its core cannabis sales, not including one-time bulk sales in the prior year, were up 25%.
Part of this was due to much higher average selling prices, up 89%, for the third quarter compared to the year earlier. However, average costs per kilogram were up 85.5%, since the margin was up slightly. As a result, its gross margins rose to 33% from 31%.
However, what was most interesting to investors, and likely helped push Tilray stock, was the company’s outlook for Q3. Here is what the company said about its Q4 profits:
“We look forward to building on these accomplishments and remain focused on our goal of achieving break-even or positive Adjusted EBITDA in the fourth quarter.”
This was after the Q3 loss for adjusted EBITDA narrowed to just $1.5 million from a loss of $12.5 million the prior year.
Investors were very pleased to hear this, as it means the company will be able to grow its business on a profitable basis.
In fact, the company was able to convert a good portion ($124 million) of its convertible notes in equity, significantly reducing its debt. Tilray has just $350 million of its 5% convertible senior notes due in 2023 left on its balance sheet. In addition, the company has $155 million in cash on its balance sheet.
Not Everyone Is Impressed
Another major reason for the rise in Tilray stock and other Canadian cannabis stocks is the incoming Biden administration. They could loosen restrictions in the food, drug and banking regulatory sectors for the sale and distribution of cannabis.
But not everyone likes this situation. As Reuters pointed out recently, many hedge funds are deeply skeptical about these companies and their ability to generate profits.
In an article titled “Too High? Hedge Funds Unimpressed by Canadian Cannabis Stocks’ Rally,” the authors point out that the Biden administration may not solve the troubles of weed producers north of the U.S. border.
Canadian cannabis companies have a fundamental cost disadvantage over U.S. producers. This is more especially relevant now that several states legalized marijuana in recent elections. This could potentially increase supply in the U.S.
Tilray is a Toronto-based cannabis company, with operations in Australia, New Zealand, Germany, Portugal and Latin America.
In fact, this is where Tilray is different from the crowd. First, it is close to achieving profitability. Second, it has operations worldwide that help diversify its revenue sources. International medical sales account for about 16% or so of total cannabis sales.
What to Do With Tilray Stock
Tilray had a $1.15 billion market capitalization at $8.60 per share on Dec. 4, 2020. This gives it a pro forma enterprise value of $1.38 billion.
Analysts project sales of $304.4 million for 2021, puting Tilray stock on a forward price-to-sales ratio of less than 3.8 times forward sales.
Moreover, assuming the company can achieve $10 million in quarterly adjusted EBITDA profits, it puts Tilray stock on an EV-to-adjusted EBITDA ratio of 35 times.
Once adjusted EBITDA profits can reach close to $100 million in several years, the stock will be on a multiple of just 13 times. That could be quite an assumption though, and a lot of regulatory relief will have to follow suit in the U.S. Obviously, this points to a good deal of risks as well in this upside scenario.
I suspect that for now, Tilray stock may have run its course for a while. However, in the long run, there is every reason the stock could move at least 50% higher, or closer to its previous highs.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
