Tilray Prints Impressive Results and Whether $TLRY is a Buy

As I write this, there is blood all through the streets in the cannabis markets.  As well there should be.  Valuations were nonsensical for cannabis stocks.  The Blue Wave is important but will take a long time to come to fruition let alone any Canadian cannabis company benefiting from it.  Then there was the Reddit attack that surged pot stocks upwards to unbelievable levels.  Now, the selling of cannabis stocks is getting pot stocks more in line with their fundamentals.

My expectation is simple: Cannabis stocks will realign with basic fundamentals.  That means there is far more selling to go.  That is an opportunity if you line up some excellent companies that are printing solid numbers.

As I write this, Tilray $TLRY is down some ~5% after falling the day before by about ~3.5%.  This, after Tilray, printed decent gains in its financials just recently.  Tilray is starting to turn itself towards a more improved outlook.  But, they still have a long way to go.  And, while the numbers are improved, this still has Tilray at the lower end of the pile.

Tilray TLRY Chart
Tilray TLRY Stock has sold sharply

First off, this analysis is Tilray alone; I will do Aphria next.  Then, I will do a projection of both stocks.

Tilray Revenues

Tilray Revenues
Tilray Revenues increased QoQ with increased international medical cannabis sales

These are record sales for Tilray.  But, let’s put this into perspective.  For the entire country, cannabis sales in Canada alone moved from $120M in October 2019 to $270M in October.  Tilray did not see that same kind of growth rate.  So, while the revenues improved, I see this as a miss overall.  Tilray, and all of the other big names, were more focused on building very large capabilities versus building a large and loyal customer base.

Here is total retail sales of Canadian cannabis to give you a visual perspective:

Canadian Cannabis Retail Sales
Cannabis in Canada has continually moved higher

There were a few standouts in the latest earnings release.  One of the standouts was the increase in international medical cannabis revenues.  Revenues for international medical cannabis improved from $4M to $11M (CAD).  That is about 20% of total revenues for the quarter.  So, international medical cannabis sales are adding to the bottom line.

But, I still point to the Canadian cannabis retail sales chart to keep everything in perspective.  While the international medical cannabis sales revenues were impressive, if you take them out of the equation then revenues were about $44M.  Basically, Tilray can’t sell its products in its own backyard.  But, it can increase sales of its secondary products abroad.  That does not bode well with me.

Nonetheless, revenues are revenues and if this is the ‘bottom’ of Tilray’s despair, then that becomes an opportunity as the company shifts its focus towards more premium branding.

Tilray Gross Margins

Tilray Gross Margins
Tilray Gross Margins are some of the worst in the industry

Tilray beats Canopy Growth $CGC in the gross margins department. And, they do that with some of the lowest gross margins in the industry, but not the rock-bottom worst.  Canopy Growth $CGC has gross margins of about 21%.  Canopy Growth beats Aurora Cannabis $ACB who come in at 17%

The best companies I have seen print some 60% – 65% in gross margins.  These better companies have better costs to contain margins while at the same time they all have better pricing with consumers.  They will beat these bigger companies in this regard.

As I mentioned in a post yesterday with Aurora Cannabis, gross margins are an optimistic opportunity.  If Tilray has a premium product they can promote and gain pricing control as well as cost controls over, improved gross margins will only add to the bottom line.

I look to these kinds of statistics because I think that may be an opportunity.   But, that does not necessarily mean I am looking to go long.  I just see this as an eventuality that the company rights itself and addresses basic business fundamentals.

Tilray Operating Efficiencies

Tilray Operating Efficiencies
Tilray Operating Efficiencies are moving in the right direction

Tilray’s operating efficiencies are moving in the right direction.  But, this is more mathematics than achievement on management’s part.  Cost efficiencies are a mathematical equation based upon total operating costs over revenues.  If revenues move higher, all else equal, operating efficiencies move lower.  That assumes a linear operating efficiency.  At the same time, if revenues were to dip, this number would head back upwards, all else equal.

But, the best companies that I have seen are printing about 30% – 35%.  Some are even printing efficiencies in the upper 20% levels.  This gives you a perspective of how over-laden with costs Tilray is.  Again, early in its history, Tilray was more concerned about building large capacity instead of a large customer base.  They are still paying the costs for these facilities they built but are not reaping the potential benefits of their capabilities.

I expect costs to continue to move lower relative to revenues so, this number will improve.  But, time is money.  And, Tilray will have to spend a lot of money before they get themselves at a competitive level.

Tilray Net Income

Tilray Net Income
Tilray’s net income gets closer to break-even

Tilray’s net income is getting closer to the point where at least they will not have a cash-burn rate.  That is very positive.  Should Tilray finally be able to break above profitability, this will be a big opportunity for the stock to increase.  I expect this to occur this year.  But, it is difficult to determine what the stock price could be at based on future fundamentals.

Conclusion: Is Tilray a good buy?

First, stock prices are out of line with fundamentals.  We are seeing the blood in the streets from this.  More blood is coming.  That, then, becomes an opportunity.

Tilray needs to develop a product line that can command higher margins.  On a comparative basis, Tilray’s margins are terrible, at best.  And, Tilray also needs to develop these products in its own backyard.  Revenue increases need to come from Canada as well as international medical cannabis.

If Tilray were to increase revenues significantly, cost metrics would balance out; a natural progression.  But, the lack of revenue gains is, to me, the real sore spot with Tilray.  Then, the lack of decent margins is also the sore spot.  This is where the focus needs to come from.

In the meantime, I expect Tilray to continue to sell-off.  There is no reason $TLRY could be valued as high as it was.

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