When Tilray (NASDAQ:TLRY) posted a small profit in the last quarter, it marked a positive turning point. Skittish investors will ignore TLRY stock because of its meme trade last year sending it to a $67 high.
Those who avoided the quick pump (momentum buying) and fast dump (panic selling) should look at Tilray’s results closely. There’s both opportunities and risks in this expanding cannabis company.
Let’s dig into some of those now.
Earnings Lift TLRY Stock Potential
Tilray posted net revenue increased by 20% to $155 million in its second quarter of the fiscal year 2022. The top-line figure may initially impress investors. This quarter’s $58.8 million in cannabis revenue, up from last year, includes Aphria and Tilray’s figures. The comparison is not the same and distorts the year-over-year improvement.
Thanks to $70 million in cost synergies associated with its Aphria business combination, it posted a net income of a modest $6 million. In fiscal 2023, Tilray will find another $20 million in synergies.
On Dec. 21, 2021, Tilray’s SweetWater, the alcohol beverage unit, acquired two craft-beer brands. They are Alpine Beer and Green Flash Brewing. Strategically, Tilray will focus on growing the brand in the U.S. market. As it waits for legalization to happen in the country, the company will have good adjacency products in the spirits and beer markets.
Upon cannabis legalization, Tilray may participate in the THC market through flower or pre-rolls. It may apply its experience in the tougher Canadian market on the U.S. market. Investors should expect to wait though, regulatory changes in the U.S. will take time. Tilray stock may fall to new lows before trading higher if the U.S. government legalizes cannabis federally.
Plenty of Opportunities
Tilray’s Manitoba Harvest is a growth opportunity. However, that did not happen yet as business fell slightly from the last quarter. Still, after it acquired the business, Tilray stabilized its hemp food portfolio. For example, in the latest 12 weeks, it grew U.S. consumption in measured channels by 2%. The company will promote the unit by educating consumers about the nutritional benefits of hemp. It will offer product trials. Consumers will gain awareness of hemp foods, and Manitoba Harvest’s products as a result.
SweetWater Brewing, Manitoba Harvest, and Breckenridge Distillery will collectively generate around $150 million in annualized revenue. Chief executive officer Irwin Simon expects the units will generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA). Tilray is expanding SweetWater beyond its 420 beer offering. It already added spirits and ready-to-drink vodka sodas. The company will need to spend aggressively on advertising the product ahead of federal legalization.
Plenty of Risks Too
Tilray rewarded its CEO with CAD 13.2 million in cash bonuses. He received $30 million in total compensation in 2021, half of which the company paid in cash. This payment suggests that Tilray expects its stock to face weakness in the quarters ahead.
On the warrant liability line item, Tilray’s liability fell from $78.2 million in the quarter ended May 31, 2021, to $40.4 million in the last quarter. Tilray’s stock drop effectively lowered its losses.
The Canadian market remains a challenge for Tilray. The country has many cannabis store openings. More limited partnerships are offering more products and competing on price. Tilray has 12 brands on the market. It is undergoing brand rationalization. This will cut costs and improve operating margins. Fortunately, Tilray consistently produces high potency, high-quality products. It needs consumers to recognize this difference compared to the competition. Until then, Tilray will lose some market share in Canada.
Overall, TLRY Stock Has a Fair Value
Most Wall Street analysts are on the fence with Tilray with a “hold” rating. According to Tipranks, the average price target is around $10.6. To justify that price target, the company needs to establish its brand and grow its market share in new regions. For example, Europe is a billion-dollar opportunity. When the countries in the region legalize cannabis, Tilray is ready to expand.
Germany and Portugal are the two countries that have the best prospects for Tilray in 2022. In Germany, the government may announce something in 12-18 months. Portugal is having policy discussions on the legalization of cannabis. It has two state-of-the-art cultivation facilities in both Portugal and Germany that provide European Union Good Manufacturing Practice (GMP) certified pharmaceutical-grade medical cannabis. For now, Tilray has the distribution channels to sell medical products.
U.S. legalization would still be the biggest catalyst for Tilray and the cannabis sector. CEO Simon said, “I do not see legalization happening in the US for at least the next two years. You’ve got an election coming up in November of this year. I don’t think it’s going to happen after that.”
Despite the company’s outlook on cannabis legalization, TLRY stock price is cheap enough for speculators to bet on. Traders may profit by buying and selling the stock as its volatility rises.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
