This year hasn't been a great one for medical cannabis provider Tilray (TLRY), to say the least. Tilray stock has been killed over the past eight and a half months with the share price crashing about 65%. The reason? Tilray produces some of the largest losses in the sector due to far flung operations around the globe, and the stock continues to trade at a market valuation that don’t match the business prospects.
Headlines Versus Reality
The recent earnings headlines have Tilray growing revenues by over 370% to reach $45.9 million. The reality is that around $19.9 million of Q2 sales came from the purchase of Manitoba Harvest.
Other areas like medical cannabis declined from Q2’18 levels to $9.1 million and international medical cannabis remains an after-thought business with sales of only $1.9 million. In addition, excise taxes ate up $3.9 million in sales leading to net sales of only $42.0 million.
The only impressive amount was adult-use cannabis that nearly doubled sequentially to $15.0 million. The company sold 5,588 kilograms for more than triple the Q2 level last year, but the cannabis pricing environment was rough. Tilray saw the average selling price crater to only $4.16 per gram, down 28% from $6.38 last Q2.
So, the headline revenue numbers appear impressive, but Tilray either bought a substantial portion of the growth or had to sell a lot more product to generate the growth. These additional revenues came at a high cost.
The stock is selling off due to the company reporting unsustainable losses. Somehow, Tilray generated an adjusted net loss of $31.2 million on sales of only $42.0 million.
Tilray didn’t breakout the losses by division, but the company had a substantial loss in Q1 so the addition of Manitoba Harvest and Nutura is only part of the problem. The Q2 gross profit was only $12.2 million so the company has a long way to covering nearly $35.0 million in operating expenses for breakeven results.
As highlighted on several occasions in the past, the Canadian LPs have vast operations surrounding the globe without the revenues to support business in multiple countries beyond the domestic Canadian focus. The Canadian adult-use market and a hemp food product focus in the U.S. is plenty of opportunity for any signal company focus, but Tilray had to expand to 13 countries on five different continents.
The global operation includes the recent expansion in Portugal to grow outdoor cannabis on ~60 acres. Again, Tilray should focus on implementing the vast opportunity with hemp products in North America and cannabis in Canada before exploring these other opportunities chased by companies all around the globe. Like other Canadian LPs, Tilray lacks any dominant market position where by to build a base to expand internationally.
Analysts have sales forecasted to grow sequentially by about $20 million every couple of quarters reaching $100 million next Q3. Unfortunately, the company is expected to continue losing money until at least the start of 2021 and the Q2 results only reinforce the lack of a reasonable path to profits. The risk is that the competitive landscape pushes this path out additional quarters and years.
The key investor takeaway is that Tilray continues on a path to ruin. The headline revenue numbers were impressive until one digs into the realities of where the revenue growth came from.
Unsurprisingly, investor sentiment is also very negative, with individual portfolios in the TipRanks database showing a net pullback from TLRY.
Based on the mounting losses, Tilray remains too spread thin around the globe and across different business lines. Avoid the stock until the company becomes more focused and the stock valuation makes far more sense.
Disclosure: No position.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.