TLRY Stock Isn’t a Buy Until It Proves Its Profitability Is Sustainable

Tilray (NASDAQ:TLRY) merged with Aphria in 2021, creating the world’s largest cannabis company. As profound as that may sound, TLRY stock has crashed 80% over the past year. With that in mind, here’s an assessment of what we might expect from the stock moving forward.

Closeup of mobile phone screen with logo lettering of cannabinoid company tilray cannabis, blurred marijuana and pipette background

Source: Ralf Liebhold / Shutterstock.com

First, let’s acknowledge the bullish thesis behind Tilray stock:

The case here still holds merit, but Tilray has lost much of its momentum. The bullish case is ultimately weakened by uninspiring fundamentals. This disappointment is amplified by the fact that the company has not yet reached notable profitability — the key strategic focus of its aforementioned merger with Aphria.

That isn’t to say that it won’t reach that point, but rather that TLRY stock is not yet a buy in my book until it starts to show the benefits behind its merger. Still, there have been some more positive headlines recently that indicate Tilray might be on the right path.

Is TLRY Stock a Buy on Hexo Deal?

On March 3 Tilray made an important announcement related to a strategic alliance with Hexo (NASDAQ:HEXO).

Tilray will acquire up to $211 million of senior secured convertible notes issued by HEXO. Furthermore, Tilray claims that the broader benefits of this deal include important cost synergies of up to 50 million CAD, accretion and flexibility in the form of additional interest revenue and product research and innovation.

While all of this seems like a positive for TLRY stock, the big question to ask is since the market capitalization of HEXO is approximately $228 million, why didn’t Tilray just acquire it rather than waiting to get a substantial ownership position in HEXO? This makes me skeptical of the overall impact of the deal.

Q2 Fiscal Year 2022 Financial Results Show Some Progress

Tilray reported milestone in Q2 FY22 financial results with a net income increase of $6 million compared to a net loss of $89 million in the same quarter for the previous year. Other standout benchmarks include:

  • “Net Revenue Increased ~20% to $155 Million from the Prior Year Quarter
  • Net Income Improved $95 Million to $6 Million from the Prior Year Quarter
  • Adjusted EBITDA of $13.8 Million, 11th Consecutive Quarter of Positive Adjusted EBITDA
  • Achieved $70 Million in Cost Synergies To Date; On-Track to Exceed Original Plan of $80 Million Ahead of Schedule and to Generate Additional $20 Million of Synergies in Fiscal 2023.”

So, given that the cost synergies work well, why is TLRY stock down 28% year-to-date?

One reason is that despite positive net income achieved, Tilray reported a comprehensive loss of $42,875 and the net income loss per share diluted was 0. One year ago, the net loss per share-diluted was 41 cents.

The most important negative factor for Tilray is that its shareholders have been substantially diluted in the past year, with total shares outstanding growing by 51.7%. That’s not a figure to be happy about.

Bottom Line on Tilray

With all of these factors considered, you might be wondering what are some key metrics to focus on moving forward.

For the quarters following the merger with Aphria, the cash burn problem has remained. Further weakness remains as on a TTM basis its gross margin has declined, its operating margin has become worse and its net margin continues to be negative despite getting narrower.

Ultimately, it is remarkable that Tilray managed to turn a net loss of $34.6 million in the quarter ending in August 2021 to a net profit ending in November 2021. However, there are still no signs of sustainable profitability … it is too early for this. The next quarters will show if profitability has finally been achieved or if it was a one-time event. The latter will disappoint investors further.

Tilray is transforming with actions not just words. Still, it is too risky to consider this penny stock an investment opportunity today. Burning cash does not create long-term value for stakeholders, and neither does significant stock dilution.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.



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