So, it’s settled: Canadian cannabis producer Tilray (NASDAQ:TLRY) plans to acquire rival Hexo (NASDAQ:HEXO). It’s debatable, however, whether this is actually a good idea. In the same press release, Tilray disclosed its financial results for the third quarter of fiscal 2023. Suffice it to say, the data doesn’t look promising, and it’s not a good time to consider buying TLRY stock.
When Tilray merged with Aphria in May 2021, this created the biggest cannabis company by revenue on the planet. Clearly, Tilray wants to be the proverbial king of the hill, as the company just agreed to buy out another Canada-based cannabis producer.
Yet, bigger isn’t always better. Tilray might could be making a crucial mistake in its upcoming acquisition. Besides, Tilray’s financial figures suggest that the company can’t really afford to make any big purchases right now.
TLRY Stock Could Soon Fall Below $1
As you may be aware, the Nasdaq exchange has been known to sometimes delist stocks that fall below $1 and stay there for too long. TLRY stock, which once traded above $100, is in imminent danger of falling below the crucial $1 cutoff line.
Why am I so pessimistic? First of all, Tilray has a poor track record when it comes to quarterly EPS results versus analysts’ consensus estimates. The latest results only continue the losing streak — but I’ll get into that momentarily.
What could precipitate TLRY stock’s decline this year is Tilray’s planned buyout of Hexo. This will set Tilray back $56 million. Oftentimes, a press release announcing an acquisition will indicate the expected revenue to come from the acquired company. That way, investors can calculate how long it might take for the purchase to effectively pay for itself.
There’s no such estimate in Tilray’s press release, so investors are basically left in the dark. Furthermore, look at what Tilray is buying for $56 million: a company with one of the worst earnings track records I’ve ever seen. Hexo is a consistently unprofitable company with 191.62 million CAD in total debt. Ask yourself: Is this really a value-added deal for Tilray?
Tilray’s Financial Figures Are Alarming
TLRY stock fell 4% in post-market trading, soon after Tilray announced its Q3 FY2023 financial results. It’s not hard to figure out why the trading community would express disappointment in Tilray’s fiscal data.
Let’s start off with this starting statistic. Tilray’s position of cash and cash equivalents dwindled from $415.909 million as of May 31, 2022, to just $164.997 million as of Feb. 28, 2023. Clearly, Tilray needs to stop the outflow of capital rather than spend over $50 million to buy a cannabis company.
Tilray’s other data points aren’t particularly encouraging, either. Tilray’s net revenue decreased 4% compared to the year-earlier quarter. Moreover, the company swung to a net earnings loss — a really awful one. Specifically, Tilray posted a net loss of $1.196 billion (that’s just in three months, believe it or not), versus net income of $52.475 million in the year-earlier period.
So, Is TLRY Stock a Buy or Sell?
I envision strong growth for the Canadian cannabis market over the coming years, and maybe you do too. Yet, this doesn’t mean it’s a good idea to invest in Tilray, with its subpar earnings and cratering capital position.
On top of all that, investors need to think seriously about whether Tilray’s acquisition of Hexo really makes sense. I’d say it’s a bad idea, and while it breaks my heart to say this, I rate TLRY stock as a sell with a price target below $1.
On the date of publication, David Moadel 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.
