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3 Glaring Problems in Tilray's Q3 Results

By Keith Speights - Nov 13, 2019 at 6:00AM

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The Canadian cannabis producer generated strong overall revenue growth. But don't overlook several key areas of concern.

If there was a Biggest Loser TV show featuring marijuana stocks, Tilray ( TLRY ) would be in the running to win the prize based on its year-to-date stock performance. Tilray's shares have plunged nearly 70% so far in 2019.

Tilray announced its third-quarter results after the market closed on Tuesday. There were some things for investors to like with the Canadian cannabis producer's Q3 update. The company reported Q3 revenue of $51.1 million, up nearly 409% year over year and an increase of more than 11% over its second-quarter total. This figure also topped the average analysts' Q3 revenue estimate of $49.4 million.

However, there were also three glaring problems.

Shadow of a dollar sign on top of a pile of cannabis leaves

Image source: Getty Images.

1. Mounting losses

Tilray posted a net loss in the third quarter of $35.7 million, or $0.36 per share. This result was worse than the company's net loss of $18.7 million, or $0.20 per share, in the prior-year period. It was worse than the net loss of $35.1 million, or $0.36 per share, in the second quarter. And it was worse than the average analysts' estimate of a loss of $0.29 per share. The company's Q3 loss would have been even wider were it not for acquisition-related income of nearly $13.5 million.

It's abundantly clear that Tilray's bottom line is going in the wrong direction. There are two main reasons why that's the case. First, Tilray's spending continues to grow like crazy across the board. Second, the company's interest expense related to its Manitoba Harvest acquisition is definitely hurting. 

2. Weak sales in two key areas

You might think that Tilray's adult-use recreational marijuana sales in Canada would have increased significantly in Q3 from the previous quarter. That wasn't the case. The company reported that recreational sales grew by only 5% quarter over quarter to $15.8 million. Investors can't be encouraged by this sluggish growth.

With Tilray taking on so much debt to fund its acquisition of Manitoba Harvest, it seems reasonable to expect sales growth from the company's new business. However, hemp product sales in Q3 slipped more than 21% from the second quarter to around $15.7 million.

The good news for Tilray was that its strength in other areas offset its weakness in the Canadian recreational market and the hemp products market. Tilray's international medical cannabis sales soared 501% year over year to $5.7 million. This more than tripled the sales level in the previous quarter, thanks to the Good Manufacturing Practices certification at the company's Portugal facility. The company also enjoyed strong growth in the Canadian medical cannabis market. These sales jumped 53% year over year and quarter over quarter to $13.9 million.

3. A dwindling cash stockpile

Keep your eyes on Tilray's dwindling cash stockpile. The company reported cash, cash equivalents, and short-term investments of nearly $122.4 million as of Sept. 30, down from $220.9 million at the end of the second quarter.

For two quarters in a row, Tilray has burned through more than $100 million in cash. If something can't go on forever, it won't. Tilray simply can't continue to deplete its cash stockpile at the current level without going to the well to raise additional capital. The main problem for investors is that Tilray's potential alternatives to raise more money will likely lead to more dilution in the value of existing shares. 

What's next for Tilray

Tilray CEO Brendan Kennedy said that the company expects "significant growth in the fourth quarter and into 2020." That's a reasonable expectation. Tilray's European sales should continue to grow with shipments from its Portugal facility. The launch of Canada's cannabis derivatives market should also boost revenue next year.

However, like several other Canadian cannabis producers, Tilray doesn't appear to be on a great track to achieve profitability at this point. Until this situation changes, investors can look for more glaring problems in the company's quarterly updates.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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