Tilray: No End In Sight

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. Image Source: Tilray website 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 should be talking about cost cuts to better align the cost structure with the reality in the current business climate of limited retail stores in Canada and too much supply. Despite raising over $400 million via a convertible debt offering and a successful IPO, the company only has $122 million in cash on hand. Even CEO Brendan Kennedy that correctly predicted the supply/demand imbalance in Canada is still full speed ahead on investing in this climate to the detriment of shareholders based on this statement on the Q3 earnings call: For the balance of the year and into 2020, we anticipate making disciplined strategic investments to drive continued expansion in the markets we already serve, enter new ones and embark upon additional strategic partnerships and transactions that will enable us to drive global growth. The company forecasts being EBITDA positive in Q4'20, but these quarterly results don't support such a scenario. The company will have major requirements to raise cash via either asset sales/leasebacks or now expensive equity with the stock down to $20. Takeaway The key investor takeaway is that investors need to see the cannabis market improve and Tilray roll back on some global investments before the stock becomes appealing. The company faces a scenario of needing to raise capital at the market lows in the next year. Investors should continue avoiding this stock until the market better rationalizes supply with demand and costs with revenues. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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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.

Image Source: Tilray website

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