Tilray Rises After Q2 Earnings: What To Know About This Cannabis Stock

Medical cannabis

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Tilray (NASDAQ:TLRY) saw its stock rise double digits after releasing earnings. On the surface, these appear to be solid results, though I do have some personal questions. The company generated impressive profit margins while overachieving on prior guidance for synergies. The stock has dropped nearly 80% since recent highs and more than 95% since all time highs – this had led to a natural reset in both valuations and expectations. The stock is looking buyable, but I also discuss whether it is truly the top pick in the cannabis sector.

TLRY Stock Price

The past few years have been a rollercoaster of a journey for TLRY investors.

TLRY stock price

Ycharts

In 2018 the stock had expanded into an outright bubble. I warned readers that the valuation had gone out of control and even named it a short idea. Since then, the stock has lost nearly all of its value.

TLRY Performance

Seeking Alpha

Even in the past year, TLRY has seen a reckoning in its stock price as the stock is down nearly 80%:

Tilray stock price

Ycharts

Perhaps the steep fall may have triggered a relief rally as expectations were getting quite low. The cannabis sector has come a long way from projecting global domination for the Canadian operators to an arguably more realistic forward outlook.

Tilray Earnings

TLRY reported a decent earnings report with net revenues growing 20% to $155 million. I note that it is unclear how the prior year’s net revenues number was calculated, as my rudimentary adding of TLRY and Aphria historical financials leads to a materially higher number than that used by TLRY – so take the 20% growth number with a grain of salt. I note that the $155 million in net revenues represents a sequential decline of 7.7%.

Investors should also keep in mind that based on revenues, TLRY is actually not mostly a cannabis company. Only 38% of total net revenues come from cannabis sales.

Tilray Q2 FY22 earnings results

Fiscal 22 Q2 Earnings Release

This is mainly due to the fact that Aphria had a pharmacy distribution business line (as well as other non-cannabis business lines) prior to the acquisition, and TLRY has continued such businesses. This is important to remember because the non-cannabis business lines can be considered to be of lower value due to the lower margins and lesser growth opportunity. TLRY’s 43% adjusted gross margin in its cannabis sales is solid considering the typical price weakness seen at other large Canadian LPs. TLRY also generated positive adjusted EBITDA of $13.8 million in the quarter. We can see the adjustments made to arrive at that number – in general, they are more or less reasonable.

Tilray Q2 FY22 income statement

Fiscal 22 Q2 Earnings Release

TLRY notes that it has already achieved $70 million in cost synergies to date and is on track to exceed the original guidance of $80 million in synergies, and to do so ahead of schedule as well. TLRY also guided for an additional $20 million of synergies next year. The company should deserve credit for this strong example of execution considering that strong execution has been noticeably absent at Canadian LPs for quite some time.

One issue I have with the reported earnings is the company’s assertion that they are generating cash flow. While TLRY is indeed adjusted EBITDA positive, the company is neither generating cash from operations nor free cash flow.

Tilray Q2 FY22 free cash flow

Fiscal 22 Q2 Earnings Release

That said, the company’s cash burn is on a much healthier level than many Canadian LP peers, and it has over $300 million of cash on its balance sheet. I do note that leverage remains sizable with $738 million of debt, but the company’s lesser cash burn profile helps compensate for that risk in relation to other Canadian LPs.

Is TLRY Stock A Buy, Sell, or Hold

TLRY look attractively valued relative to other Canadian operators in my cannabis coverage, including the likes of Aurora Cannabis (NASDAQ:ACB), Canopy Growth (NASDAQ:CGC), and Cronos (NASDAQ:CRON), many of which are not generating positive adjusted EBITDA (or even positive gross margins):

Tilray vs peers financials

Cannabis Growth Portfolio

(Cannabis Growth Portfolio Research)

TLRY’s stronger margins more than offset the lesser exposure to direct cannabis sales. I do note that Village Farms (NASDAQ:VFF) remains one of the more compelling investment ideas in the Canadian sector.

However, TLRY does not look attractively valued compared to the US operators in my coverage. We can see that compared with names like Curaleaf (OTCPK:CURLF), Trulieve (OTCQX:TCNNF), Green Thumb Industries (OTCQX:GTBIF), and Cresco Labs (OTCQX:CRLBF), TLRY is priced at more aggressive multiples in spite of generating inferior profit margins.

Tilray stock vs peers valuation

Cannabis Growth Portfolio

(Cannabis Growth Portfolio Research)

The discrepancy is made more clear when we recall that US operators face unique challenges due to cannabis not being legal at the federal level. US cannabis operators pay higher interest expenses and higher tax rates, as they are unable to deduct normal operating expenses like rent, interest costs, or employee wages from taxable income. Yet in spite of these challenges, US operators are still outperforming their Canadian peers. US operators trade at huge discounts to Canadian peers due to their OTC listing as well as the fact many institutions are unable or unwilling to invest in US cannabis stocks until cannabis is decriminalized on the federal level. Individual investors are not restricted by such mandates and thus are not forced to invest in Canadian operators like TLRY and could instead invest in the more compelling US operators. Once cannabis is decriminalized, US operators would no longer face such challenges and institutional capital will likely flood into the sector. I view TLRY to be buyable at current levels, as the 22x gross profit multiple should provide for significant upside potential as the Canadian legal market begins to make headway against the illicit market. That said, investors are likely better off focusing on the stocks of US operators due to the more compelling valuations and stronger fundamentals.


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