Following a rough first half of the year, cannabis stocks are finally enjoying some positive momentum. Key players Tilray (NASDAQ:TLRY), Canopy Growth (NASDAQ:CGC) and Cronos (NASDAQ:CRON) are finally gaining significant ground. Though the news cycle for the botanical sector was light, Tilray last week released its financial results for its fiscal year 2022, featuring some positive dynamics. Combined with legalization news from Switzerland, the industry may be rising in sympathy.
On July 28, Tilray reported that FY 2022 net revenue increased 22% to $628 million compared to the prior year. When adjusted for currency fluctuations, net revenue increased by 29%. Additionally, net sales in the fiscal fourth quarter (ended May 31, 2022) amounted to $153 million, representing year-over-year growth of 8%. On a constant currency basis, Q4 sales increased by 14% to $163 million.
In addition, management disclosed that it expects to generate $70 million to $80 million of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). As well, it anticipates to be free cash flow positive in its operating business units in FY 2023. Thus, the leadership team believes it has a foundation set for profitable and sustainable growth.
On the international front, cannabis stocks may be responding to a Forbes article, which reported that Switzerland has now fully legalized medical cannabis and allows for exporting the historically maligned plant. Notably, from Aug. 1, Swiss patients can get medical cannabis through a prescription.
Interestingly, Tilray tweeted a link to the Forbes article, presumably because the company specializes in medicinal cannabis. In 2018, Tilray inked a research deal with the University of California School of Medicine.
Cannabis Stocks Still Have a Challenging Road Ahead
Jefferies analysts weighed in on Tilray’s results for FY 2022, particularly noting that they see “signs of Canadian improvement” in the disclosure. Despite this glimmer of hope, Jefferies trimmed its price target by 23%, aiming now for a $9.30 per share. To be fair, the analysts reaffirmed their “buy” rating for TLRY stock.
This somewhat mixed messaging generally reflects the overriding mood for cannabis stocks. Though the increase in Tilray’s revenue combined with the Switzerland news are encouraging news items, it’s important to note that this “green” sector remains embattled. For instance, while TLRY stock is up 14% in the afternoon session, on a year-to-date (YTD) basis, it’s down 47%.
A similar narrative haunts Canopy Growth and Cronos. Although both firms are enjoying a resurgent swing this afternoon, they’re down 69% YTD and 21% YTD, respectively.
Moreover, investors should recognize that not every item within Tilray’s FY 2022 report was heartening. Specifically, net loss in fiscal Q4 was $457.8 million, comparing very unfavorably to net income of $33.6 million in the year-ago quarter. The aforementioned net loss included a non-cash impairment of $395 million.
Management stated on its disclosure that the “impact was related to changes in market opportunities causing a shift in our strategic priorities, and market conditions inclusive of higher rates of borrowing and lower foreign exchange rates.”
In other words, the Federal Reserve’s policy of attacking the soaring inflation rate through higher interest rates is affecting Tilray to some degree, posing concerns for cannabis stocks broadly.
Why It Matters
Although beleaguered stakeholders of cannabis stocks will take whatever positive catalyst roll their way, they also face stern risks from the black market. As higher borrowing costs weigh down the market — as Tilray’s FY 2022 disclosure admitted — the temptation for consumers to seek illicit (and therefore cheaper) botanical products will likely rise. Therefore, cannabis investors are still not out of the woods.
On the date of publication, Josh Enomoto 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.
