The strong rally in Tilray (NASDAQ:TLRY) and other cannabis stocks before and after the U.S. election will create winners and losers. Tilray stock, which struggled since going public, have the biggest risk of downside ahead.
Investors should expect TLRY stock to face selling pressure as its international expansion plans falter.
Tilrayâ€™s notes exchange for common stock is a near-term headwind.
In the third quarter, Tilray posted revenue hardly changing from last year. Revenue rose by 0.6% Y/Y to $51.4 million. It lost 2 cents a share on a GAAP measure. The company ended the quarter with $155.2 million in cash.
The 11% decline in the cannabis segment revenue is troubling. Tilray explained the decline is due to the discontinuation of bulk sales in Canada Medical sales.
A Closer Look at Tilray Stock
Medical sales for adult-use and international rose by 26% and 42%, respectively. If the company excludes bulk sales, then total cannabis revenue rose by 24%.
The lack of overall sales growth will frighten cannabis investors. The stock trades at around five times sales. Its debt/equity at 2.6 times will also weigh on its balance sheet.
Tilray cannot continue operating at slow growth rates while justifying the current stock valuation. Investors are better off buying Cronos (NASDAQ:CRON), betting that the investment from Altria (NYSE:MO) will help it.
Constellation increased its investment in Canopy to around 55.8% of its common shares. Conversely, Tilray does not have a major shareholder to help it financially or to guide it from a leadership perspective.
The additional $72.9 million exchange agreement will keep the company afloat as it continues burning cash every quarter. Shareholders should frown on the stock dilution, which rivals that of Aurora Cannabis (NYSE:ACB).
Investors have no choice. On Nov. 11, Aurora took advantage of its stock rallying and raised $150 million through a 20 million share sale.
In both cases, investors must suffer the stock dilution or face bankruptcy risks. Neither scenario is any better than the other. Unless Tilray finds an operating model that will lift revenue while cutting operating costs, it will never post profits. It might start by re-formulating its global growth model.
Global Market and Tilray Stock
CEO Brendan Kennedy explained the weakness of the German market on its conference call. He said that Tilray had some issues with quotas. So, shipments it was scheduled to ship from Canada and from Portugal to Germany in Q3 were delayed by four to six weeks. The revenue is pushed into Q4.
Speculators may bet that revenue in the European markets will improve sequentially.
Furthermore, the company thinks that investments in its GMP facility in Portugal will pay off. It has a medical cannabis cultivation and processing facility in the European Union. So, since it resolved its operational disruptions, the European market, especially in France, will improve.
Tilrayâ€™s Manitoba Harvest has CBD products in the U.S. market, but it has many tasks ahead before performance improves in the region. It does not have brand awareness yet. Long-term, the opportunity increases as it increases its presence in the U.S. For now, CEO Kennedy said the big question is what its distribution model will look like.
Investors will need to sit tight before assuming Tilray is a strong player in the U.S. market. Readers may look at Multi-State Operators, in addition to Canadian marijuana companies, as explained here.
Tilray is the least attractive cannabis firm to consider. Anyone holding shares should lock in profits and invest in several other MSOs and marijuana companies instead.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.