Many marijuana stocks that have gone public in the past few years have made considerable sums of money for their initial investors. One of those early winners was the British Columbia-based Tilray (NASDAQ:TLRY). A year ago, TLRY stock became one of the first Canadian marijuana companies to debut on the Nasdaq stock exchange at an opening price of $23.05.
By Sept. 19, Tilray shares defied gravity and hit an all-time high of $300.
Initially, especially around the time of legalization in Canada in October 2018, most of these stocks moved in tandem and went up. However, 2019 has so far been a different story. As companies report earnings, investors are better able to gauge the fundamentals of these stocks. And investors are not shy to penalize those that do not make the cut.
Tilray stock has once again been on the radar of cannabis stock investors as the initial euphoria seems to have completely been replaced by question marks and volatility. TLRY now trades around $40. Year-to-date, the stock is down more than 42%.
Which leaves us wondering what may be next for Tilray stock in the last five months of 2019.
How Tilray Stock Makes Money
On May 14, Tilray stock released first-quarter 2019 earnings. The marijuana cultivator’s revenue comes from four segments:
- Adult use, i.e., Canadian retail recreational consumer;
- ACMPR, or, Access to Cannabis for Medical Purposes Regulations (direct to patient & bulk), i.e., Canadian medical;
- Food products; and,
- International medical.
Tilray reported a loss per share of 32 cents, missing the estimate of a 24 cents loss a share. In the previous quarter TLRY stock’s loss per share had been 32 cents.
The company’s Q1 revenue came at $23 million, including excise taxes. Adjusting for taxes, Tilray’s revenue was $21.5 million, beating expectations.
Adult use and ACMPR revenue were about $7.88 million and $7.76 million, respectively. Tilray’s food products segment revenue came at about $5.5 million. And international medical brought in $1.8 million.
Earnings reports in the next two months — from TLRY as well as rivals such as Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) — are important in gauging the health of the industry, as not everyone is convinced that Canadian recreational sales will remain strong. Many investors are worried that the initial hype surrounding the industry could indeed be waning.
Tilray’s Food Products
It would be important to highlight that about a quarter of Tilray’s revenue was from the food products segment. In February, Tilray acquired hemp food manufacturer Manitoba Harvest. This deal gave TLRY access to the U.S. cannabidiol (CBD) market. And all of the food products revenue came from Manitoba Harvest’s products, which are sold in retail stores both in Canada and the U.S.
Meanwhile, readers may well remember that in December 2018, the U.S. legalized hemp and hemp-derived ingredient CBD, especially popular among consumers seeking relief from physical pain. Because hemp is now an ordinary agricultural commodity in the U.S., many Canadian producers are planning to capitalize on this development.
As marijuana is illegal at the federal level in the U.S., transporting CBD across the U.S.-Canada border is also illegal. In order to participate in the growing CBD food and drink market in the U.S., Canadian producers are looking open up facilities on this side of the border.
Wall Street believes TLRY, as well as other Canadian producers, will seize upon the market expansion opportunities that legalized hemp provides. However, it will probably be several quarters before the investments would pay off and turn into profits.
Why TLRY Stock Price has Been Falling
The downtrend since October 2018 is a stark reminder to investors that TLRY stock’s all-time high of $300 is now in the rear-view mirror. Many industry watchers concur that there are both industry-related and company-specific reasons behind this decline in Tilray shares.
Increasing losses have contributed to Tilray stock’s decline. In Q1, the net loss was $30 million, up from $5 million year-over-year. Like its peers, TLRY has high operating expenses. The red ink at the bottom of its income statement, quarter after quarter, is becoming a worry for shareholders.
Investors are beginning to get concerned about how increased spending is reducing earnings and cash flow numbers. Many analysts are concerned that the valuations in this new consumer market are extremely high, that most of the cannabis stocks are going through cash fast and that many are not likely to achieve profitability in the near future. Have the share prices for most marijuana companies gotten ahead of themselves?
If further growth doesn’t come from the rest of the world, especially the U.S. Wall Street is likely to start substantially devaluing most of these pot companies. Then Tilray’s stock price could face further selling pressure.
Tilray and its cannabis peers are in effect agricultural producers without a strong competitive advantage. They all have similar business models, similar offerings and face similar opportunities as well as threats in the market place. In other words TLRY stock does not have a competitive moat that justifies extremely high valuation levels.
Bottom Line on Tilray Stock
Heed the investing truism: risk and return go together. Where there is a potential return, there is also a potential loss. So far, cannabis stocks have been largely driven by hype and publicity. I regard Tilray stock as quite a risky investment in the marijuana space.
New investors may want to wait until the next earnings report in late August. Long-term investors may consider buying into Tilray shares around $30 and expect to hold them for several years.
Current TLRY investors with paper profits may want to take some money off the table. Alternatively Tilray shareholders may consider hedging their positions with covered calls or put spreads.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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