Cannabis stocks were rallying throughout the election cycle as the polls pointed toward a Democratic victory. However, that elevated investor enthusiasm is starting to wear off as it’s becoming clear that Congress is more divided on cannabis than expected. Hence relatively smaller players such as Tilray (NASDAQ:TLRY) and Tilray stock are brought down to earth.
The cherry on top was its lukewarm third-quarter results marred by the slowdown in domestic revenue. However, it has shown potential on the international front with a substantial increase in its international medical cannabis sales. Still, it’s not enough to justify Tilray stock, which is trading at 64% lower than its 52-week high price.
When Canada legalized marijuana back in 2018, several startups looked to gain the first-movers advantage. Most companies continue to have success in the growing Canadian cannabis market. However, Tilray’s domestic revenue slowed in the past couple of years. On the flip side, it is gaining traction on the international front with its medical cannabis products. It would take time for it to make substantial inroads internationally and unlock a whole new avenue for growth.
So-So Third Quarter
Tilray’s earnings results were somewhat disappointing in the past several quarters. Its third-quarter results were no different, as its revenue was at $51.4 million, missing estimates by more than $3.5 million. Cannabis revenue dropped 11.3% year-over-year. However, despite the lower revenue, its net loss of 2 cents per share was significantly smaller than the analyst expectations. Most investors would feel positive about this development, but in reality, its operating loss increased to $32.8 million from $23.8 million a year earlier. Its net loss narrowed down during the quarter due to a foreign exchange gain and a re-valuation of its warrant liability.
Its liquidity situation is also worrying. It is burning over $20 million annually, as its unprofitable at this time. The company will reduce its research and development expenses and general expenses from $48 million to $26 million annually. Despite these efforts, its cash balance is $155.2 million, while its cash balance a couple of years ago was $487 million.
International Expansion Opportunity
As I mentioned before, Tilray’s international cannabis revenue was impressive and could potentially be a growth driver for the future. Its revenue from the international medical cannabis market rose 42% from the third quarter of 2019. Its medical cannabis business is just starting to take-off and is gaining recognition from different stakeholders. For example, Australian researchers used Tilray’s product in their cancer study and noted its effectiveness in reducing nausea and vomiting among patients. Perhaps an even more exciting development is its cultivation license from the government of Portugal. It will now produce and export its products from its facility in Portugal to various parts of Europe.
Moreover, it recently partnered with Cannadoc, an Israeli medical cannabis company. It presents an amazing opportunity for Tilray to capitalize on a highly lucrative Israeli market. Apart from the EU, it also has its presence in New Zealand, Australia and Latin America.
The company’s performance on the domestic front remains an area of grave concern. It faces stiff competition from some bigwigs in the industry who have a lot more experience, to be fair. On the flip side, its recreational cannabis fared well lately, which grew by 26% in the third quarter. The segment includes cannabis derivatives such as beverages, vapes and others.
Final Word on Tilray Stock
It seems that the cannabis sector turned a corner this year, but companies such as Tilray failed to make their mark.
The company’s domestic market is growing, but its revenue from home slowed down considerably. Moreover, its liquidity position is also worrying with a massive reduction in its cash equivalents.
The international market could be where the company derives most of its sales in the future. However, it is currently a pipe dream, which will take some time to materialize in full. Therefore, Tilray stock is an unattractive investment at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.