Investors excited by the revenue headlines from the Q3 report for Tilray (TLRY) were hoodwinked into falling for the great Canadian cannabis disaster. These companies were built for massive growth and acquired additional global growth opportunities only to watch pricing collapse during this year of great growth following the approval of Canadian adult-use about a year ago. The $2.2 billion market cap remains far too expensive for their position in the market.
Mild Revenue Growth Considering
The company wants to promote the 400+% growth in the just reported quarter, but investors expected far better results when Tilray topped 10,000 kg in quarterly sales. Net revenues weren’t as impressive when compared to the prior quarter as sales only grew from $42.0 million to $48.2 million as follows:
Adult-use – $15,834 vs $15,041 ACMPR – $13,909 vs $9,078 Hemp/Food – $15,650 vs $19,935 Int’l medical – $5,708 vs $1,850
The company had impressive growth in the medical markets, but the adult-use and hemp production division (Manitoba Harvest) struggled. One of my theories about these relatively small cannabis companies is that Tilray and most of the Canadian cannabis LPs spread themselves far too thin trying to tackle multiple market segments on a global scale.
What really sticks out as problematic is that kg sold nearly doubled from 5,588 in Q2 to 10,848 kg in Q3. The average net selling price collapsed in the quarter from C$6.12 per gram to C$4.32 per gram. The amount was down nearly 50% from C8.26 per gram last Q3.
Not Built This Way
For whatever reason, Tilray and the other large cannabis companies weren’t built for a market flooded with supply while the illegal market was still rampant. The company didn’t build for a market where price would collapse to where 10,000 kg of sales would only generate $15.9 million in gross profit.
For Q3, Tilray spent $17.0 million on sales and marketing expenses alone. Any elementary math would conclude these metrics are problematic with total operating expenses topping $42.0 million.
The end result is that adjusted EBITDA losses are escalating with the Q3 loss up to $23.5 million from $17.9 million in Q2.
Source: Tilray Q3’19 earnings report
The company is in a competitive business based on a commodity product, yet the spending levels are based on a high-tech company with valuable patents and a competitive moat around the business. The company