Tilray (TLRY) quickly earned a reputation of being a hot pot stock back in 2018, with its stock price surging from $29.77 in July 2018 to peaking at $214.06 in October 2018 after becoming the first cannabis company to go public on a U.S. exchange. Since then, it's become clear the stock was a victim of industry overexcitement, losing more than 85% of its market cap once the intial allure wore off.
Now with a market cap of just $3 billion, Tilray received another piece of mixed news when Wall Street's top cannabis analyst, Vivien Azer of Cowen & Co, cut her target price for the company by 60%, down from $150 to only $60. While this is seen as a loss of confidence for the company as analysts recognize that the former heights seen by Tilray are no longer a realistic possibility, a $60 price tag is well above the $30.71 Tilray is currently trading around.
This begs the question of whether investors should consider Tilray a good buying opportunity right now, or whether they should just leave the stock alone?
Revenue growth isn't telling the full story
According to Tilray's recent Q2 financial results, revenue grew by 371% to $45.9 million. While this seems like a headline-grabbing figure at first glance, a deeper look reveals that this isn't that impressive. The recent purchase of Manitoba Harvest, a hemp-based food retailer, has added its revenues on top of Tilray's, giving the impression that Tilray had a big spike in growth. When factoring out food-related product revenues, Tilray only saw 126% revenue growth.
Net cannabis revenues came in at only $22 million for the quarter, a small figure for a company with a $3 billion market cap. Even more worrying is that gross margins fell to 27% compared to 43% in Q2 2018. Operating expenses have also been growing, coming in at $44.8 million, a 195% increase from Q2 2018.
But perhaps the most alarming of all is the significant decline in what Tilray has been able to charge for its products. The average net selling pricing per gram dropped by 28% to $4.61. While some of this can be attributed to the company shifting from selling exclusively to an adult-use medical capacity to more recreational users, a retail price in the $4 range suggests wholesale prices could be as low as $3, an extremely low figure for the industry. One possible cause could be the ongoing logistical issues with Canadian dispensaries. Provincial retailers and crown corporations are continuing to struggle to put enough pot on shelves despite the fact that producers claim to be struggling to sell off their excess production.
Tilray's CEO Brendan Kennedy said in an earnings call, "In the next 12 to 18 months, we believe there could be a supply balance in Canada as the markets finds an equilibrium between supply and demand." Unfortunately for cannabis companies and their shareholders, 12 to 18 months is still a long time to wait for sales figures to stabilize.
All these factors led Tilray to report a $31.2 million loss for the quarter. With the Canadian retail environment still seeming as bottlenecked as ever, investors are right to question whether Tilray will even reach its ambitious revenue estimates for the future, $350 million for 2020 and $588 million for 2021.
What should investors do?
Current Wall Street sentiments on Tilray are mixed. While Azer's downgrade might seem like a massive cut, it is still a wildly optimistic assessment of the stock in comparison to other analysts such as Gordon Johnson from Vertical Group, who says Tilray is worth just $4. Between the two experts, one suggests a 100% upside while another thinks the stock could fall by another 87%.
What does seem clear is that Tilray isn't going back to its former highs in the $150 to $200 price range. Most of the raw excitement surrounding the industry has evaporated since last year, with the last catalyst of popular excitement being Canada's upcoming 2.0 legalization of CBD-derivatives. While Tilray is involved in the CBD-derivatives market, that remains only a portion of its overall business. Overall, investors aren't as impressed by raw revenue growth figures anymore and instead want to see something more tangible from its cannabis investments. Tilray's mediocre financial figures certainly haven't delivered in that regard.
While it's possible that Tilray could have some upside potential, I have to ask why an investor would choose the stock over any number of other companies with a stronger fundamental base. There are plenty of cannabis companies to pick from and there's no reason for someone to pick anything less than the best. There are still plenty of exciting opportunities, whether they be smaller, niche plays or well-established cannabis companies that do everything Tilray does but better. Tilray might have been the talk of the town a year ago, but in today's market, it has really lost its appeal.