Tilray Inc (NASDAQ:TLRY) is a leading global cannabis company with subsidiaries in North America, Europe, Latin America, Australia, and New Zealand. It has a portfolio of successful brands and a large footprint across the globe.
Yet despite cannabis being largely listed as essential, Tilray’s stock took a pummeling in the aftermath of the coronavirus. It’s now trading under $10 USD per share from peaks of nearly $150 following its 2018 IPO. This turbulence has investors wondering – will Tilray stock bounce back?
Cannabis is increasingly being legalized and decriminalized across the world, with the United States standing as the final country in North America to follow suit.
The industry is reporting a 40 percent sales increase in 2020, and the November elections mean it’ll soon be legal in more places than ever before. But the legal market is still competing with a strong black market, and the associated costs can be extraordinary.
It’s time to determine whether Tilray’s market bottomed out and whether it can reach investors’ initial expectations. First, we need to understand why it dropped in the first place.
Why Did Tilray Stock Drop?
Tilray was among the first companies to go public amid Canada’s recreational cannabis legalization.
Share prices skyrocketed as everyone rushed to own a legal piece of the cannabis industry, but the entire market tumbled in the aftermath of the legalized market.
Startup costs in the cannabis industry are higher than most, and the company’s financials soon showed it was bleeding cash in every direction, putting it in debt that can get expensive fast.
Making ends meet in the wholesale marijuana market isn’t easy, and margins are razor thin (assuming you can find a buyer when the market reaches a surplus, which is exactly what happened in Canada in its first two years of legalization).
This put Tilray in a position where operating expenses continue to climb, while sales are slumping. This puts a double squeeze on it, which continues pummeling the stock price. As of October 2020, the market cap is now around $700 million.
Share prices are just barely above OTC levels, and it dropped over 7x more than the S&P 500 in September. This has investors wondering whether the company finally bottomed out and if it can bounce back to anything close to its 2018 highs.
Here’s a brief look at the company’s financials to see where its stands heading into 2021.
Tilray Financials Are Cause For Concern
Despite all the bad news, Tilray is growing over time. Revenue in the second quarter of 2020 (reported August 2020) showed the company increased revenue by 10 percent over the same quarter of 2019 to $50.4 million. Of course, that didn’t stop it from experiencing an $81.7 million loss, which was largely due to inventory adjustment.
There was also a one-time bulk transaction to terminate a supplier contract. Besides that, it lowered its net cost per gram to $3.42 year over year. This gave the company a negative 10.7 percent net margin, where it’s usually at 27 percent.
The company also deals with foreign currency exchanges since it’s based in British Columbia. The Canadian dollar strengthened over the U.S. dollar, which helped the company gain $13.3 million for the year. Still, it’s down to only $137.2 million in cash, with another $250 million it can access to spend when needed.
This gives only gives it a runway for the remainder of 2020 and 2021 before it’s going to need to raise capital again. Although Tilray has sales in recreational cannabis, medical marijuana, and hemp, so it should be able to squeeze profits from all three.
Still, investors are conversative about investing in Tilray and cannabis in general. This is putting a squeeze on its market cap.
Is Tilray Stock A Buy?
Tilray isn’t alone – the cannabis industry had a rough time in its infancy. Aurora Cannabis Inc (NYSE:ACB), for example, has been on the fast track toward delisting ever since the summer of 2019, and its reverse stock split in the summer of 2020 did little to stop its fate.
The initial green rush of investors flooding the market was quickly replaced by constant bad news for anybody still holding shares. But that doesn’t mean it’s not a Buy.
Instead of focusing on growing its revenue strictly through the broader recreational market, it’s deep into clinical trials for pharmaceutical uses of its cannabinoid stocks. This means it’s working to gain approval from each country’s regulatory bodies to legally prescribe its medications.
It’s this strategy that many investors see as a reason Tilray stock is discounted. Should it gain FDA approval for use of its cannabis capsules by chemotherapy patients, for example, it would tap into a $158 billion industry with exclusive first sales rights. This could be a big deal (if it works), but there’s always risk involved.
Risks of Buying Tilray Stock
The cannabis industry is an expensive one to enter – the price of a license in each state alone costs upwards of $2 million. This puts a hefty overhead burden on the company, and that’s just for cannabis.
It’s also taking on the median cost of $19 million to obtain FDA approval for each indication it wants clinical trials for. These are long, time-consuming processes that aren’t guaranteed to produce favorable results.
Because it’s paying all these costs up front, Tilray is quickly draining its cash runway. By next year, it’ll need to show some type of payoff if it wants to continue raising money from a weary market.
Wil Tilray Stock Bounce Back? The Bottom Line
Tilray is one of Canada’s leading cannabis companies, and it has a broad global reach that could help it in the long run. However, the expenses of operating in this industry are overwhelming.
On top of this, it’s also highly focused on the medical uses of the cannabis plant, which puts even more obstacles in its way. This is why the company is losing money, but it’s also what could provide big gains in the future.
With clinical trials running in different countries on the medical usage of cannabis, it’s paving a new lane in the medical marijuana industry.
If it can successfully bridge these new herbal medicines with traditional pharmaceutical data, the company could have a hit. However, it’s a major if that’s not going to be an easy road for the company nor its investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.