Since the beginning of the year, the stock of Tilray Brands (NASDAQ:TLRY), a leading global cannabis producer, has lost some ground, down 3% to $6.80 per share. TLRY stock has performed better than the broader market on the period, due to renewed investor interest from the prospects of this leading cannabis actor and its poor stock performance last year.
One of the biggest exchange-trading funds of the cannabis industry, with assets under management of over $200 million, is the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO). The YOLO ETF lost 14% YTD to $11.15 per share. The SPDR S&P 500 Trust ETF (NYSEARCA:SPY), by comparison, withdrew by 7% to $439.90 per share. In the past few quarters, investors have pulled out from the industry, and YOLO lost more than 60% of its market capitalization since its high of $31.87 per share attained in February 2021.
With that in mind, let’s go through TLRY’s development prospects, financials and valuation metrics. These can help us gauge if it can put an end to its downward trend.
TLRY Stock Is A Leading Actor of The Cannabis Market
TLRY has a leading position in the recreational cannabis market in Canada, the U.S. and Germany. The global size of the cannabis industry is expected to grow rapidly in the next few years. According to Globenewswire, the cannabis market should increase by a Compound Annual Growth Rate (CAGR) of 27.25% in the 2021-2026 period, reaching a terminal value of $54.41 billion.
In addition, TLRY is well-positioned to benefit from the softening of the European legislation on recreational cannabis usage. With Luxembourg becoming the second European country to legalize its usage in October 2021, Germany is likely to endorse it later this year. This will have a material impact on Tilray’s business, given that the company is already present in the country with a market share of roughly 20%.
Furthermore, TLRY has enhanced the variety of products it markets, offering several new beverages and wellness-based cannabis products. For instance, Tilray can leverage two of its brands in the U.S., namely SweetWater and Manitoba Harvest, to expand its portfolio of products and enhance its revenues. SweetWater is the nation’s 11th-largest craft brewer, and Manitoba Harvest is a pioneer in hemp, CBD and wellness products.
TLRY Has Encouraging Financials, But It’s Still Profitless
The company published encouraging financial metrics in the second quarter of 2022. TLRY’s top line advanced 19.8% year-on-year to $155.1 million, whereas net income reached $5.79 million, compared to a net loss of $89.2 million in Q2 2021.
For fiscal year 2022, analysts are forecasting TLRY’s top line to advance by 28.5% YoY to $659 million, before increasing by 11.5% in 2023 to $735 million. Despite that, the company’s profitability is esteemed to remain in the red zone. With an expected net loss of $175 million in 2022, which should decelerate moderately in 2023 to $114 million, TLRY’s net margin is forecasted to remain negative, establishing at 15.5% in FY2023.
In terms of the balance sheet, TLRY’s cash and cash equivalents melted by 32% in the last six months, falling to $331.7 million. This has been attributable to TLRY’s active acquisition strategy. In December 2021 it bought Breckenridge Distillery. This will enable it to position itself more broadly ahead of the possible federal legalization of marijuana in the United States and to rapidly develop its line of cannabis-infused beverages.
While continuing to solidify its positioning in the U.S., TLRY managed to generate more than $70 million in cost synergies after the combination with Aphria. It is now expecting to exceed its initial plan by $20 million in 2023.
With these advancements, TLRY stock is forecasted to increase free cash flow in 2022, posting for the first time a beneficial amount of $42.6 million compared to a negative figure of $83.6 million last year.
The Cannabis Specialist Trades at a Reasonable Premium
The cannabis-focused company has overvalued valuation multiples compared to peers, trading at an expected 2022 EV/revenue of 5.1x and EV/EBITDA of 57.6x.
Curaleaf Holding (OTCMKTS:CURLF), one of the biggest companies in the sector by market capitalization, is valued in line with TLRY’s EV/revenue, with a ratio of 5.16x. On the other side, CURLF’s EV/EBITDA is nearly one-third of Tilray’s, establishing at 21.1x.
Canopy Growth Corporation (NASDAQ:CGC), another major player in the cannabis market, is more expensive in terms of 2022e EV/revenue, posting a ratio of 8.2x and but has a negative EV/EBITDA of 13.2x.
Aurora Cannabis (NASDAQ:ACB), a smaller Canadian-based cannabis company in terms of market capitalization, is currently exchanging at a slight premium in terms of 2022e EV/revenue compared to CGC, posting a ratio of 5.65x, but has an EV/EBITDA ratio of 40.1x.
TLRY is trading at a premium, especially as regards EV/EBITDA. However, I believe that Tilray’s geographical diversification and the broad range of product offerings justify its price. I have therefore a bullish view in the long-term on TLRY and believe that the loosening of cannabis regulation in Europe and more broadly in the U.S. will be a game-changer for the company.
On the date of publication, Cristian Docan 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.
Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies.