Tilray (NASDAQ:TLRY) isn’t a bad company. And Tilray stock isn’t a bad stock.
Indeed, there are some things to like here. Tilray provides a play on cannabis growth worldwide — and that’s a market on which I remain enormously bullish. It’s why I offer my Cannabis Cash Weekly service, and why I’ve recommended patience even as early performance in the Canadian market has disappointed.
Tilray’s balance sheet is in decent shape. Other companies are in better shape; others, far worse. The company has a reasonably diversified product offering, with sales in Canada and overseas. On that front, too, some rivals are better, and others compare poorly.
In other words, Tilray stock is fine as far as it goes. But even with the rally in the sector since early November, I believe investors can do better. Much better.
Were Earnings Good Enough?
The rally in cannabis stocks over the past six or seven weeks seems driven by too factors. First, election results in the U.S. have driven optimism toward legalization at the federal level. That would enable the likes of Tilray to enter the market. Current regulations surrounding banking and even U.S. stock exchange rules have left the American market to so-called MSOs (multi-state operators).
Second, earnings reports in November were solid — or, at least, better than feared.
Tilray stock definitely has benefited from the first catalyst. In six trading sessions between Nov. 2 (the day before Election Day) and Nov. 9, TLRY rallied 77%.
As for the second catalyst, perhaps not so much. The stock fell 17.5% the day after its third quarter earnings release, after the close on Nov. 9. It has since fallen modestly from that post-earnings close, even as a key sector ETF (exchange-traded fund) has extended its rally.
It’s not hard to see why. Tilray’s earnings weren’t enough to keep the post-election optimism going. If you exclude bulk sales (which Tilray has paused amid a glut of Canadian product), cannabis revenue did increase 24% year-over-year. But that revenue should be growing. The market expanded significantly between Q3 2019 and Q3 2020, thanks to retail store growth and the launch of “Cannabis 2.0” products.
Quarter-over-quarter, the top line looks weak. Cannabis revenue rose just 4% even with the industry recovering from the novel coronavirus pandemic. Medical sales fell double-digits.
Simply put, that’s not good enough.
Silver Linings
To be fair, there was some good news.
Tilray’s gross margin did improve nicely in Q3, to 33% on an adjusted basis up from 26% the quarter before. The improvement came in the cannabis business, where margins of 27% were significantly better than the 10% in Q2.
And Tilray is moving toward profitability — sort of. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss in the third quarter was just $1.5 million. Obviously, Tilray still has a lot of work to do, but it’s moving in the right direction.
Late last month, meanwhile, Tilray improved its balance sheet. The company exchanged almost $200 million in convertible bonds for Tilray stock. Debt now is down to about $278 million, against quarter-end cash of $155 million.
Here, too, there’s still work to be done, but Tilray at least has taken away some of its risk.
Better Choices Than Tilray Stock
But if you look close at even those moves, the news isn’t quite as good as it seems. The margin and EBITDA improvements in Q3 are coming almost solely from cost-cutting measures, as Tilray management itself detailed. Those measures were necessary in the face of a smaller-than-expected Canadian market, but they can’t go on forever.
The convertible debt exchanges lower risk — but they also dilute shareholders. Tilray closed last year’s third quarter with about 98 million shares outstanding; the figure should be roughly 50% higher by the end of this year.
More broadly, we get back to the core problem: nothing about Tilray stock really stands out. The balance sheet is improved, but there are rivals sitting on war chests of more than $1 billion.
Nearing EBITDA breakeven is progress, but there are cannabis operators already well in the black on that basis.
Tilray management has done a decent job, but larger operators have installed new chief executive officers with decades of experience at major consumer companies.
Tilray stock doesn’t even stand out in terms of valuation. Truthfully, I can’t think of one edge that TLRY has over other stocks in the sector. Without that edge, it’s not hard to see why Tilray has underperformed over the last few weeks, and it’s not hard to believe that it will continue to do so.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
